Factoring transaction is a financial tool, in which the rights for receivables resulting from the sale of goods or services or that can be documented with an agreement is transferred and offering the seller at least one of these services; guaranty, collection/ receivables management and financing.
Domestic factoring is the factoring transaction, in which the Client (Seller), the Debtor (Buyer) and the Factor (Factoring company) are all in the same country. The client who wants to make a factoring transaction applies to the factoring company and submits the necessary information and documentation. Factoring company makes its offer to the client.
The offer includes the services that will be provided and the commissions and fees that will be charged. An agreement is signed between the factoring company and the client. The client transfers the receivables resulting/will result from the sale of goods or services with the relevant documents. The factoring company has the right to demand additional documentation.
Overseas factoring is the factoring transaction, in which the Client (Seller), the Debtor (Buyer) and the Factor (Factoring company) are in different countries. After the buyer informs the seller of its order, seller provides the factoring company with information about the buyer. The factoring company researches the buyer’s credibility and informs the seller about the limit and the terms it can allocate. An agreement is signed between the seller and the buyer, the goods are delivered. Seller sends a copy of the bill to the factoring company.
The factoring company pays the seller a down payment in line with the terms in the agreement. The factoring company collects the receivable from the buyer at the expiry date and pays the seller the remaining balance.
Factoring can be used in every area of commerce. Everyone who has a tax identification number and conducts business according to the laws can utilize factoring.
There is a difference between bank credits and factoring, especially in terms of accounting technique. Bank credits are accounted in financial obligations, while factoring is only accounted for in assets.
Factoring reduces the receivables and increases the balancesheet’s liquidity. If the factoring transaction is irrevocable, it can be treated as an off-balancesheet item.
There are three types of services; financing, guarantee and collection. All three or one of the services can be employed according to the agreement signed with the client.
Financing is the down payment of part of the long-term receivables to the client, guarantee is the guaranteeing of the receivables in question, in case the buyer is in financial difficulty, and collection includes the management, tracking and collection of receivables and reporting to the client.
In an irrevocable factoring transaction, the factoring company undertakes the risk that the receivables are not collected, and unless the seller sends defective goods, cannot hold the seller responsible.
Whereas in revocable factoring transactions, the factor does not undertake this risk and claims the down payments back in case the debt is not paid. Domestic factoring transactions are generally revocable.
There are two types of costs in factoring transactions, depending on the nature of the transaction. The first one is the commissions and charges paid in case the receivables are collected and / or a collection guarantee is given.
The other is the interest that will be paid, in case the down payment opportunity is facilitated.
