What types of factoring are there?

If you're thinking about using factoring, you need to know more about this form of financing. Invoice financing itself is a fairly simple process, but it's a complex topic. Understanding factoring services for businesses, knowing the different types available, and finding the right option for your business can help you manage your cash flow effectively with this financial solution.

Each factoring company has its own unique way of providing financing through factoring. While there are some differences in how each factoring company delivers this solution, this financing method can take several forms.

What does the factoring market in Romania look like?

In 2021, the invoice factoring market saw a slight increase compared to the previous year. According to the Romanian Factoring Association, it reached a value of 5 billion euros, a surprising figure given the economic situation in 2020.

Looking at the turnover of companies that used invoice financing in 2020, the statistics show that:

• 42% of companies have turnover between 5 and 50 million euros;
• 36% of companies have turnover of more than 50 million euros;
• 22% of businesses have turnover below 5 million euros.

As for the business sectors of companies that use factoring, the ranking shows that:

• the FMCG sector ranked first in 2020, with a receivables volume of 1.2 billion euros (20% more than in 2019);
• the IT&C sector ranked second, with a receivables volume of 700 million euros (13% more than in 2019);
• the sector called "Automotive, Machinery, Equipment" ranked third in 2020, with a transaction volume of 693 million euros (10% more than in 2019).

What is factoring?

To understand the different types of factoring, we first need to define this type of financing. Factoring is a financing method designed for businesses facing cash flow problems because customers are late paying their invoices.

Most commercial sales, whether we're talking about products or services, are structured to give the customer the option to pay invoices by a specific due date. Since this is a common sales practice, companies that want to stay competitive need to offer customers these payment terms so they don't turn to competitors.

The problem with offering these payment terms is that many businesses, especially smaller ones, can't afford to do it. They need funds to cover their own expenses and keep operations running.

This is how the need for invoice financing appeared. Factoring provides financing by using receivables (checks, payment orders, etc.) as collateral. In practice, you get an advance on slow-paying invoices, which gives you the working capital you need. This type of financing is ongoing, but individual transactions are settled after each invoice is paid.

What types of factoring are there?

There are several types of factoring, and each factoring provider also has its own unique way of completing transactions. Factoring can be classified as follows:

1. Based on the scope and the way receivables are acquired and managed:

• Partial factoring means certain invoices are selected, while others are not purchased. In this case, the client is responsible for collecting the invoice amounts, since the factor does not manage them.
• Full factoring means the factor takes over the acquisition and management of all invoices. This means the factor also handles collecting the amounts from the debtor, financing the transaction, and covering the credit risk.

2. Based on when the factor provides invoice financing:

• Immediate-payment factoring means invoices are financed by the factoring company when it receives them.
• Maturity factoring means invoices are paid when the receivables become due (a due receivable is a receivable for which the due date has passed, meaning the debtor's payment term to the creditor has expired).
• Mixed factoring means the factoring company can pay, as an advance, up to 80% of the invoice value. The difference can be repaid at a later agreed date.

3. Based on the confidential nature of the transaction:

• Closed factoring means the client has the right to keep it secret that they requested the services of a factoring company;
• Open factoring means the client sells all invoices to the factor and has the right to notify the debtors.

4. Based on the right of recourse:

• Recourse factoring, also called factoring with recourse, means the risk of bankruptcy or non-payment of invoices is borne by the client. The factoring company is only required to manage and finance the receivables by paying the invoices. The factor has the right of recourse against the client only if the debtor has not paid the assigned receivables by the due date.
• Non-recourse factoring means the factor takes over both the assigned receivables and the risk of bankruptcy or non-payment by the assigned debtor. If, for various reasons, the assigned debtor does not make the payment, the factoring company has no right of recourse against the client.

5. Based on the parties involved in the invoice financing transaction:

• Domestic factoring means invoice financing is carried out under a commercial contract concluded within the same country, with the help of a single factoring company.
• International factoring means the factoring transaction is carried out under an international commercial contract, with the help of two invoice financing companies, one for export and one for import. The export factoring company is responsible for purchasing the client's, meaning the exporter's, receivables from the importer, which it then assigns to the import factoring company.

Which type of service is best?

Although the question may seem obvious, the answer isn't as simple as it looks and is often the subject of heated debate in this field. That's why you need to use the solution that would deliver the most benefits for your business.

In this respect, today's factoring companies act as advisors when evaluating the right option. By using the factoring services offered by Instant Factoring, you can reduce debt effectively while making sure you sell only to companies that can pay their invoices on time.