Types of Factoring

Local or domestic factoring is that in which all the parties reside in the same country. International factoring exists when the account debtor is located in another country.
As a tool, factoring is broad and varied, making it difficult to include under a few headings all the many alternatives that exist.
The most frequently used forms adopted can be classified under the following few headings.

Factoring with Recourse
Under this system the factor advances a percentage of some or all the client’s accounts receivable, with the client being responsible for the uncollectibility risk. the percentage to be financed will depend on the prior analysis by the factoring company, as described above. The amount withheld will be made available to the client once the factor has collected the full amount of the accounts receivable, deducting uncollectible balances and any discounts that may have been made by the account debtors.

Factoring without Recourse
A similar mechanism to that described above, but in this case the factor bears the uncollectibility risk. In general, this mechanism is used when the account debtors are leading companies with a low risk of non-payment. As in the previous instance, the factor withholds a portion of the amount to be collected as a margin. The financing charge is higher than in the case of factoring with recourse.

Global Factoring
In this case, the client delegates responsibility for the collection management of all its accounts receivable. Such agreements are usually signed with clients with a limited number of account debtors for significant amounts. Contracts are entered into for specified periods.
In the case of funding requirements, one of the two previous forms are adopted.

Individual factoring
The client selects a certain number of its account debtors, for which it assigns collection responsibility to the factor. As in the previous instance, the factor may provide financing on all or some of the accounts ceded for collection.

Bulk Factoring
This mechanism is not frequently used in Argentina.
Under this system it is the client and not the factor that remains responsible for the collection management of the receivables portfolio and the control of credit. Debtors are however notified of the assignment made to the factor and can make payment directly to the latter or to the client, if the factor has provided a collection authorization.
This system is suitable for clients with an efficient control of credit and a very broad base of debtors that have been assigned, all with very small individual invoice amounts.
The client is thus able to obtain financing on the basis of its invoicing.

Export Factoring
International transactions are generally carried out over terms of up to 180 days and are documented using letters of credit opened by the importer. The importer’s bank participates in this mechanism as long as certain conditions are complied with. The issue of this documentation is subject to strict rules, as the opening of a documentary letter of credit by a banking institution guarantees payment when the supporting documentation is provided in due legal form. The process of opening a letter of credit includes an implicit risk to the exporter of shipping the goods without having a guarantee from the participating bank, holding a common credit on the importer. Export factoring is an alternative solution to the problems of international trade.

International factoring requires the involvement of two factors, one in the country of the importer and another in that of the exporter. Each of the factors signs a factoring contract with its client, agreeing the terms appropriate to their capacity as importer and exporter, respectively. In turn, the factors agree on compliance with the liabilities assumed, specifying type of security, commissions to be charged, method of settlement for the transactions and resolution of potential conflicts.

The increasing participation by factoring companies in international business is explained by the quality of the risks of receivables that arise from international transactions.