Factoring can be briefly characterised as a method of the financing of short-term receivables (mostly with due dates within ninety days). For the assignment of receivables the factoring company provides finances and in this way the assignor will acquire the monies earlier than he could possibly collect them from his debtor. Moreover the factoring company deals with the collection and measures leading to the collection of the receivables in question.

The factoring company very frequently finances receivables arisen on the grounds of supply of goods or provision of services, without any other security, only on the basis of assessing their overall quality and possible risks in relation to individual purchasers (debtors). The receivables of the client are assigned to the factoring company, which then becomes their new sole owner including ancillary rights.

The co-operation is based on a factoring contract, which in principle is a general contract of assignment of receivables, where the parties will agree on the period and conditions under which the assignment of accounts receivable due from specified debtors will take place between them.

Upon the assignment of receivables, the factoring company will provide its clients with various amounts of advance payments, usually ranging around 70-90% of the nominal value of the receivables assigned. These financial resources tied in receivables are released to be re-used even before their due dates. After the settlement of the receivables by the purchaser in favour of the factoring company, the remaining value of the receivables (additional payment) is paid out to the client, however only after deducting the costs of financing, i.e. the costs of the factoring company.

Factoring is divided into two basic groups: 
  • recourse
  • non-recourse

In the case of recourse factoring, the factoring company does not assume the risk of the purchasers' payables not being settled and in the case of the purchaser not being able or willing to make the payments, the receivables are returned after the expiration of a certain time period back to the client, who then pursues the settlement of the debt himself (and obviously has to return the provided advance including the costs of the factoring company).

In the case of non-recourse factoring the risk of the purchaser's insolvency or unwillingness to pay is borne directly by the factoring company, which accepts the receivables itself in a "non-recourse" manner and then implements the whole procedure of their recovery, if necessary. 


The advantages of factoring may be seen mainly in the following: 

  • speed - provides sources of flexible financing 
  • enables more precise cash-flow planning, allows determining how many days after issuing the invoice, the monies will be received 
  • enables providing longer due dates, which in relation to business partners may lead to a competitive advantage 
  • enables reducing the volume of short-term bank credits and "improves" the accounting situation of the company (improves financial and ratio indicators) and reduces the dependence on banks 
  • enables the financing of "extraordinary" projects, seasonal peaks or other fluctuations caused by increasing stock, seasonal sales, advertising campaigns or company expansions. 

It is a more and more frequently used modern tool, which mainly due to its speed and flexibility is a very suitable additional means of financing. However, it is not suitable for ordinary, long or medium-term financing, in view of its costs being higher than a standard bank credit.