Exploring Factoring: Unveiling the Types and Styles of This Powerful Form of Business Financing

Factoring is one of the oldest known forms of commercial finance and though it has grown steadily through the centuries, its basic structure and list of services is still very similar to those found in transactions referenced during the Middle Ages.  Over the centuries, factors have created many transactional programs to accommodate particular customer types.  Today, factoring programs and specialty areas are expansive and nearly as numerous as the factors themselves.  Still, the nuts and bolts basics of accounts receivable factoring remain the same and can actually be divided into just two major styles;  Maturity Factoring and Advance Factoring.

Maturity Style Factoring

Maturity Factoring, with its historical roots imbedded firmly in the garment and textile industries, has been common in America since the 1920’s and is known by a variety of other names such as Traditional Factoring or Old Line Factoring.  All true maturity factoring arrangements are primarily structured around the factor’s provision of credit and collection services rather than that of actually advancing cash for financing.  In a standard maturity style  factoring transaction:

  • The factor provides credit analysis of a client’s customer or group of customers.
  • If not paid timely by the customer, the factor pays the owed amount upon credit approved accounts in an agreed upon number of days after sale, delivery, and invoicing.

If a credit approved customer is unable to pay an invoice due to insolvency or bankruptcy, the factor provides payment as guarantor.  There are no “advances” of cash made under a true maturity factoring arrangement. Payment is only made at the average maturity of the invoice batch if the purchased accounts remains unpaid.

As mentioned, maturity factoring is historically related to the garment and textile industries where it is still routinely found.  In fact, some aspects of modern maturity factoring in America are easily traced back to the Colonial era of “king cotton”.  Because of the massive (and ever growing) amounts of offshore manufacturing now prevalent in this industry, true maturity factoring arrangements are no longer as common as they once were.  In fact, recent polls of the industry reveal that well under twenty percent (20%) of all factors now offer a maturity-styled factoring product.

Advance Style Factoring (California Factoring)

Since maturity factors historically purchased and had control over a client’s accounts receivable, a natural and eventual service addition to the maturity style was to provide some form of “pre-payment” or finance option upon the invoices purchased, rather than just traditional credit analysis and collection services.  Such requests were already occurring on occasion in the maturity factoring arena and enough in fact, for some creative California-based factors to style a completely new type of factoring based upon an immediate advance of cash rather than just credit and collection services.

California factoring, most often called advance factoring, focused on industries other than garments and textiles and created a powerful new and accessible form of small business finance now available to cash-starved entrepreneurs nationwide.  Unlike maturity factoring arrangements where the client expected to wait 30-60 days before payment was received, the new advance factors tended to put their clients on almost a C.O.D. basis.  Advance factoring was initially directed towards smaller clients, typically those business owners generating under $150,000 in sales each month, since this was a business segment largely ignored by the nation’s large maturity factors.

Once the advance factoring transaction was perfected, this new factoring style grew exponentially.  Today, the advance style of factoring represents a strong majority of all transactions and an ever growing segment of the asset-based finance industry.

The Growth of Advance Factoring

As the prevalence and popularity of the modern advance-style of factoring grew, hundreds of industry types and segments were added to the range of prospective factoring clients.  It’s now safe to say that the days of factoring services being primarily associated with the garment and textile industries have likely ended forever.

In a standard advance-styled factoring transaction today:

  • The factor advances funds on purchased accounts immediately with cash being wired directly into the client’s business bank account.
  • The factor still provides expert credit analysis and collection service for the client’s benefit.
  • If a credit approved customer is unable to pay an invoice due to insolvency or bankruptcy, the factor may make payment as the guarantor under non-recourse arrangements or may not under recourse arrangements.  In a non-recourse arrangement, the factor’s guaranty of payment only extends to matters of insolvency or bankruptcy of an approved customer and not trade disputes related to poor performance.

Recourse and Non-Recourse Factoring

One of the questions most often asked by prospective clients is:  What happens if one of my customers doesn’t pay?  The answer depends on the kind of factoring facility provided or more accurately, whether the factoring arrangement is one of recourse or non-recourse.

As you already know, traditional factoring (maturity factoring) was a service which provided credit analysis and collections rather than financing.  The factor paid the face value of invoices ONLY if the customer failed to pay within the allotted time under the terms of payment granted.  Since the factor is the guarantor in a maturity factoring arrangement, all such arrangements are non-recourse by definition, meaning the factor has no option if the invoice is unpaid due to insolvency or bankruptcy.  The factor takes the loss and pays the client.

In modern advance factoring arrangements, factors can provide their services either on a recourse or on a non-recourse basis.  Under a non-recourse method, the factor will be responsible for the losses on credit-accepted accounts which are not paid based on the insolvency or bankruptcy measure.  Under a recourse method, however, the client is said to “warrant” the payment of the invoice by the customer.  If the purchased invoice goes uncollected after a stipulated period of time (usually 90 days), the factor will charge back (force the repurchase of) the invoice to the client’s account.

Its important to note that California-style recourse factoring, is most often employed to deal with smaller clients, often with even smaller, marginal account debtor credits.  Non-recourse factoring simply doesn’t provide the necessary service to the client who is primarily in need of financing and immediate cash under all circumstances. Obviously, a factor is not going to agree to guarantee and purchase large amounts of invoices generated from sales to very small retailers that could realistically “close up shop” tomorrow.

So, in some cases, small customers may be responsible for a relatively large portion of the total sales of the factor’s client.  In such instances where a client sells to a majority of small “mom and pop” businesses and establishments, the guarantees provided by non-recourse factoring are unrealistic and simply will not do the job.  Only a recourse-style transaction can provide the much needed working capital and cash flow solutions.


Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top