Forms of Short-term Financing/Factoring
Accounts receivable are the basis for factoring. Factoring is the discounting to the holders of accounts receivables by providing financing in the form of cash to them by a factor. Factors are organizations that specialize in the financing of specific industries that are known to them. They thus have collecting clout against buyers who are responsible for paying the account receivable(s).
Factoring occurs in two forms-with recourse and without recourse. The difference lies in who takes responsibility if the buyer (debtor) does not pay. When a with recourse option is exercised, issuer of the invoice is forced to pay the factor if the debtor who is responsible for paying the account receivable (invoice) but does not pay the factor. Foreign credit insurance is often used as added protection for the issuer of the invoice. Without recourse means that the factor buys the account receivable (invoice) outright and takes full responsibility for its collection without being able to go back to the issuer of the invoice for reimbursement. Factoring is mainly used for small transactions that are available for short- term financing on a continuous basis.