Factoring: What You Assign to the Factor and Who Pays for Deferred Payment

Factoring is financing against the assignment of a monetary claim: a supplier has shipped goods on deferred payment terms but, instead of waiting for the buyer to pay, sells that claim to a factor and is paid at once, while the factor in return gains the right to collect the debt from the buyer and keeps a fee for the waiting period and for administration. In Russia the legal basis is Chapter 43 of the Civil Code: Article 824 defines the contract of financing against the assignment of a monetary claim, and the articles that follow set out the terms of assignment, the client's liability and the factor's rights with respect to the debtor. This is not a loan: the subject of the transaction is an asset (accounts receivable), not borrowing against collateral.

What exactly happens to the claim

The key mechanism is the transfer of the right of claim. After the assignment, it is the buyer, not the supplier, who owes the factor. That is why the financing limit depends first and foremost on the quality of the debtor: its payment discipline, the resilience of its business and its settlement history. A supplier with a thin balance sheet can obtain financing against shipments to a large retail chain even where a bank would refuse it a loan — because the credit assessment is made of a different entity.

Assignment can be disclosed, when the buyer is formally notified and pays into the factor's account, or undisclosed, when settlements formally continue to run through the supplier. The undisclosed arrangement keeps the commercial relationship with the counterparty confidential, but it raises the factor's risk and therefore costs more.

Recourse: who keeps the risk of non-payment

The main distinction in factoring is whether there is recourse. Under factoring with recourse, if the buyer fails to pay on time, the factor turns back to the supplier and demands repayment of the financing it advanced. The risk of non-payment stays with the supplier, but the rate is lower. Under non-recourse factoring, the factor takes on the risk of the debtor failing to pay: the supplier has sold the claim outright. This is more expensive, but it changes the economic substance of the transaction — it becomes closer to the sale of an asset than to raising debt.

What makes up the price

The cost of factoring is almost never expressed as a single rate. It is usually the sum of a financing fee, charged for every day the money is used and often linked to the key rate; a document-processing fee for each delivery; and charges for additional services — verification, debt collection, risk insurance.

Hence the next trap: a percentage quoted "for the deferral period" looks modest, yet on an annualised basis it can turn out to be considerably higher than a credit line. The correct comparison is to bring all the fees to an annual effective cost and set it against the alternatives: a bank overdraft, the company's own bond issue, the risk-free curve. The OFZ curve is a convenient benchmark for the risk-free component, and corporate borrowers' premiums can be found in the bonds section: many factoring and leasing companies fund themselves on the public market, and their quotes show what the factor itself pays for money.

Reverse factoring

The deal is sometimes initiated not by the supplier but by the buyer. In a reverse (agency) arrangement, a large company agrees with a factor that it will serve the company's suppliers: they receive payment early, the buyer gets a longer payment deferral, and the factor earns the spread. For the buyer's treasury this is a working-capital management tool; for the suppliers it means access to a rate based on their customer's credit quality.

Auditors and rating agencies scrutinise such programmes closely: if the deferral stretches well beyond the market norm, trade payables in substance turn into borrowed financing, and reclassifying them changes the debt load shown in the financial statements.

What to look for in the financial statements

Traces of factoring show up in the dynamics of receivables and payables, in the notes to the financial statements and in the breakdown of finance costs. Under a non-recourse arrangement, receivables are derecognised from the balance sheet and turnover improves — but it improves because of a financing charge, not operational efficiency. The issuers' financial statements help to weigh one against the other: revenue growth combined with suspiciously stable receivables turnover is a reason to look for factoring programmes in the notes. Definitions of terms found in contracts and notes are collected in the glossary, and news on the funding market in the news section.

Steps for a supplier

Step 1. Assess who your debtor is — the financing is granted not against your balance sheet but against your buyer; gather its payment history.

Step 2. Check the supply contract for a ban on assigning the claim: such a clause is common and blocks the deal until it is agreed with the buyer.

Step 3. Ask the factor for a complete schedule of fees and bring them to an annual effective cost.

Step 4. Separately pin down what counts as non-payment and who bears the loss in a commercial dispute.

Step 5. Agree on the technical side: electronic document exchange, the format of registers, and the procedure for notifying the buyer.

Where factoring does not fit

The instrument works where there is a monetary claim, confirmed by a shipment, against a solvent counterparty. It does a poor job of covering a cash gap before delivery, does not finance the purchase of raw materials and will not rescue a business that is loss-making by design: the cost of the deferral will fall on the same thin margin. Restrictions also arise in contracts with state customers — the assignment of monetary claims there is regulated separately and has historically been contested; this is a point where you need a lawyer's advice on the specific procurement procedure rather than a general rule.

A separate caveat: specific rates, limits and the list of licensing requirements for factors are not given in this article — the brief contains no numerical market parameters, and inserting an estimate "from memory" into a text about the cost of money would be unacceptable.