Factoring - Invoice Discounting
Factoring and invoice discounting are two financing methods that are commonly used in connection with leveraged buyouts. Accounts receivable factoring involves a business selling its accounts receivable to a third party lender, called the factor, at a discount. Invoice discounting is a similar to accounts receivable financing. It involves the assignment of accounts receivable as supposed to the sale, to a third party lender who makes a loan to the company. Both are forms of asset based lending.
There are two types of factoring: recourse and non-recourse. Recourse factoring is the most common and requires that the company must buy back any invoices where the factoring company is unable to obtain payment within a defined period of time. Nonrecourse factoring means the factoring company assumes all of the risk, with a few exceptions. Not all factoring companies offer non-recourse factoring and those that offer it, charge higher rates because of the higher risk. Not all factoring companies offer the same terms and most have a preference for certain industries.