Factoring is a credit type used in domestic and foreign trade processes, especially to meet short-term financial needs. The party applying for the factoring service is called the Customer or Seller, the party paying the payments is the Debtor or Buyer, and the party providing the factoring service is called the Factor.
As you know, the seller and the buyer have certain expectations in trade. The seller's goal is to sell the product quickly and in cash. The primary purpose of the buyer is to get a quality product and pay in installments. In other words, the buyer's primary goal is to pay the seller after selling and cashing in the purchased goods. Suppose the buyer purchases the product and wants to pay later, and the seller has to pay the manufacturer immediately. In that case, there is only one system that can meet the expectations of both parties, and that is Factoring. After the product's sale, the seller has the Right to Claim money, and the buyer has the Payment Obligation. The seller's transfer or concession of this demand to the factoring company is called factoring.
Factoring has three main functions:
Guarantee: A factor is a guarantee by the company to the seller that the buyer will pay the payment on time.
Collection: The factor company provides the service to collect the buyer's receivables from the seller.
Finance: It is the meeting of the seller's need for cash ahead of time by the factor.
Explanations of key terms used in factoring:
Full Factoring - Provision of all factoring services by the factor to the seller.
Recourse - If the debtor does not pay the unconfirmed receivables, the factor returns the amount to the seller.
Commissioned Factoring - Service fee paid to the factor, calculated on the discounted amount of receivables.
Factoring Limit - The upper amount by which the seller's receivables are guaranteed against the factor's debtor's risk of difficulty in payment.
International Factoring - Factoring operations where the seller, debtor, and factor are not in the same country.
Correspondent Factor - Another third-party Factoring Entity that serves as one of the factors in a two-factor system.
Export Factor - A factor located primarily in the seller's country and responsible for dealing with the seller.
Import Factor - A factor that is mainly in the debtor's country and is responsible for the transaction by providing security in the debtor's name.
Chain Factoring - Including receivables from the debtor's sales in the factoring operation based on the factoring guarantee given to any customer.