CAT / FIA FFM Syllabus F. Credit Management - Factoring and invoice discounting - Notes ^{6 / 7}

The distinction between factoring and invoice discounting:

1. Invoice discounting

   is effectively a short-term loan in which a company borrows against its outstanding receivables. 

   The unpaid sales invoices are pledged as collateral to the company (or bank) provides the financing. 

   The borrowing company receives less than the face value of the invoice, the difference being the cost of borrowing, or discount.

2. Factoring

   involves the administration of debt collection, in which the factor buying a receivable manages the process. 

   The factor may do so on a recourse or non-recourse basis.

   Recourse: In the event a debt is written-off, the factor has the right to demand payment from the company from which it acquired the debt/receivable;

   Non-recourse: The factor bears the full credit risk of the debtor’s failure to pay.