When we talk about factoring, we’re talking about selling ones receivables or collection of receivables to a third party commercial financial company. The aim of such a transaction is to receive cash quicker than one normally would if it would wait for the collection due dates or even late payments. You’ll be getting your money within agreed deadlines and provided the financial company is reliable you can concentrate your focus on your business now.

What about accounting however? When factoring receivables you should consider two distinctions – you can recourse factor or non-recourse factor. Difference between the two arises mainly from the subject matter of eventual ownership of the receivable. Recourse financing assumes you’ll be responsible for buying back the invoices previously sold and for which the client has not paid during the pre-determined period of time (set within the factoring agreement). Non-recourse factoring is then the opposite and means that the risk of non-payment by the client is completely assumed by the factor or the company who bought your receivables. From those two the first is used if you’re simply trying to manage the cash flows and the latter if you’re seeking to have zero bad-debt expense and don’t want the hassle with receivables collection. Obviously due to higher credit risk the latter is also more expense for one’s company.