12.
Explanation
Factoring is a financial transaction where a business sells its accounts receivable (invoices) to a third-party company (the factor) at a discount in exchange for immediate cash. There are various types of factoring to suit different business needs. Here are the common types of factoring:
1. Recourse Factoring: In recourse factoring, the business retains some level of liability for the unpaid invoices. If the debtor doesn’t pay, the business must buy back the invoice from the factor or replace it with another. It’s generally less expensive but riskier for the business.
2. Non-Recourse Factoring: Non-recourse factoring provides more protection to the business. If the debtor doesn’t pay, the factor bears the risk, and the business is not responsible for repurchasing the invoice. However, non-recourse factoring tends to be more costly than recourse factoring.
3. Invoice Factoring: This is the most common form of factoring. It involves selling accounts receivable to a factor, which advances a percentage of the invoice amount (usually around 80-90%) upfront and the remainder when the debtor pays, minus the factor’s fees.
4. Spot Factoring: Also known as single invoice factoring, spot factoring allows businesses to factor individual invoices as needed, without committing to ongoing contracts. It offers flexibility but can be more expensive per invoice.
5. Bulk Factoring: Bulk factoring involves selling a batch or a portfolio of invoices to a factor in one go. This can be cost-effective for businesses with a significant volume of invoices.
6. Maturity Factoring: In maturity factoring, the factor advances a certain percentage of the invoice amount upfront, but the remaining percentage is paid to the business only after the invoice matures, regardless of whether the debtor has paid.
7. Advance Factoring: Advance factoring provides businesses with a high percentage of the invoice amount upfront, often 90% or more, but at a higher cost. It’s useful when a business needs immediate cash flow.
8. Construction Factoring: This type of factoring is specific to the construction industry. It helps construction companies meet their cash flow needs by factoring invoices related to construction projects.
9. International Factoring: International factoring involves transactions across borders. It helps businesses dealing with international clients and can handle currency exchange and compliance issues.
Each type of factoring has its pros and cons, and businesses should choose the one that best aligns with their financial situation and needs. Factors may also specialize in specific types of factoring, so it’s essential to select a factor that suits your business requirements.