Factoring of Accounts Receivable Definition

When accounts receivable are factored without recourse, the factor (purchasing institution) bears the loss resulting from bad debts. For example, if a receivable whose account has been factored becomes bankrupt and the amount due from him cannot be collected, the factor will have to bear the loss. Factoring without recourse radically changes a company’s financial structure. By removing receivables from the balance sheet, it immediately improves the debt-to-equity ratio.

• Since the third party pays less than the total value of the receivables, the company loses out on the full income it would have received if it had collected the debts itself.
• The company is still ultimately liable for the invoices if they remain unpaid past their due date.
• If the factor has the right to sell or pledge the transferred receivables, and the transferor has relinquished control without significant continuing involvement, it typically becomes a true sale.
• Once the back of the check is signed, it becomes negotiable and allows for the transfer of money ordered by the check.
• • With recourse means the seller retains certain risks and obligations if the customers fail to pay.• Without recourse shifts most of the risk of nonpayment to the factor.

The assignment can be done either as a sale of receivables or as a collateral for a loan. Factoring Coy (Company) offers recourse factoring; it means that in case the account receivable is not paid in 90 days after the due date at the latest, it is reassigned back to the client. This is the cheapest way of financing, but ultimately the risk of non-payment remains in the books of Supplier. So, it can be considered as bridge financing to cover the short-term Cash shortage. The provisions that regulate the parties suggest factoring is much better suited for use by businesses and sole traders. Since the main purpose of companies is to make investments for profit, they must at all times keep track of the funds they have available for investment, and factoring is a quick way for firms to secure finance.

Factoring of Accounts Receivable

Accounts receivable represents the money owed to a company by its customers who have purchased goods or services on credit. By assigning these receivables, the company effectively sells its right to collect the debt to the third party. When looking for a factoring company, it is important to research several competent factoring firms and compare their terms. This is an important step to take regardless of whether you are looking for recourse or non-recourse factoring. Some of your clients may make better candidates for recourse factoring than others.

Journal entries:

This is due to the factoring receivables with recourse will generate the contingent liability to the company that sells receivables. And if such contingent liability is material and is likely to occur, the company not only needs to disclose it in the notes on financial statements but also needs to make provision for it by recognizing the loss immediately. In factoring with recourse, the assignor is liable for factor accounts receivable assignment without recourse the collectability of the account receivable on its due date (since the account receivable is yet to mature). However, there are some differences, with the factor being entitled to seek recovery from the assignor or the debtor or both, an option not available with assignment. By contrast, the LCT does not specifically define the features of assignees, who are instead described only as ‘third parties’.

Conversely, “without recourse” financing means that the lender takes the risk of non-payment by the obligor. The lender takes these risks directly and cannot seek payment or seize personal assets not specified in the debt contract. The $13,000 of loss on sale of receivables comes from the fee charges of $5,000 plus the estimated loss due to uncollectible receivables (recourse liability) of $8,000. For example, assuming the factoring receivables of $100,000 in the example above is with recourse.

Non-recourse factoring companies

See details about Atomic, in their Form CRS, Form ADV Part 2A and Privacy Policy. See details about Atomic Brokerage in their Form CRS, General Disclosures, fee schedule, and FINRA’s BrokerCheck. – Domestic factoring has as its subject-matter accounts receivable arising from transactions in the domestic market. Companies considering receivables assignment must also be aware of legal and regulatory considerations.

Regardless of the structure, factoring can improve cash flow, reduce credit management responsibilities, and provide companies with working capital to support day-to-day operations. For this type of an agreement conclusion, determining insurance limit for selected buyers is essential. The main advantage for Client (Supplier) is that there will be no recourse in case that Buyer will not pay for the delivery, on the other hand there must be certain credit history of this Buyer available to Insurance company. The payee, Bob, decides to pay off his debt to Maggie by endorsing the check, which involves writing his name on the back exactly as it appears on the front of the check.

• Impatient Inc. had already provided allowance for doubtful debts in the factored accounts receivable and a bad debts expense was recognized in the income statement of year ended December 31, 20X4.
• If the assignee is unable to collect all of the accounts receivable, it has no recourse against the assignor.
• If the loan is secured “without recourse,” the lender often uses the mortgaged property as collateral.
• The factor assumes the risk of collectibility and absorbs any credit losses in collecting the accounts receivable.

If a debtor fails to pay, the third party can seek reimbursement from the company. This type of assignment is less risky for the third party and typically results in a higher percentage payment to the company. Once the receivables are assigned, the third party assumes the responsibility of collecting the debts. The third party collects the full value of the debts, making a profit from the difference between the amount paid to the company and the total value of the receivables. Rather than waiting for the due date, a company may quickly convert its receivables into cash by selling them to a factor for a fee, which is usually a small percentage of the total value of receivables being factored. As the due date approaches, factor meets receivables and collects full amount of cash.

The assignor is required to supply the factor with any and all relevant information (contract, invoice, bond, bill of exchange), and must also notify the debtor that the account receivable has been assigned. Once the debtor receives this notice, the debtor is required to pay the outstanding debt to the factor (an arrangement identical to that in assignment). A readily observable difference between factoring and assignment lies in the definition of the debtor .

Each company has its own specific requirements when it comes to factoring without recourse. That’s why we carry out a detailed study of trade receivables, current contracts and applicable accounting standards (IFRS, French GAAP, US GAAP…). This approach enables us to structure an optimised factoring without recourse scheme, guaranteeing a transfer of receivables with no negative impact on financial accounts. In an economic environment where cash management and balance sheet optimisation are key issues, factoring without recourse is emerging as a strategic solution for companies. This approach offers powerful leverage to improve balance sheet financial ratios, secure trade receivables and strengthen financing capacity. By being aware of common mistakes and following these tips for accurate record-keeping, businesses can avoid errors in recording journal entries for assignments of trade receivables and ensure compliance with accounting standards.