This is an assignment (sale) of receivables where the risk of nonpayment associated with the assigned receivables is transferred to the factoring company. This risk is then delegated to a specialized insurance company, which is why this is sometimes referred to as factoring with insurance. Non-recourse factoring integrates the benefits of financing, receivables management and assumption of risk of a customer being unable or unwilling to pay.
Non-recourse factoring is a good option for financing receivables from key partners, where non-payment of a receivable could jeopardize the very existence of the supplier. It is also used in supplying to foreign or untested customers.
The standard is for the factoring company to pay upfront a portion of the assigned receivables’ value, usually 80% (advance). After the receivables are paid by the customer, the factor pays the remainder of their value, that is 20% (balance).
If the customer is unwilling or unable to settle the receivable, the holder of the receivable (the factoring company) reports a threat of the insurance claim within a pre-agreed period of time. The advance paid is then covered by the indemnification from the insurance company. No balance is paid as it represents the client’s participation on the loss.
In addition to non-returnable financing upon assignment of a receivable, the supplier – client of the factoring company – obtains insurance for the receivables, which guarantees the transfer to the factor of the risks and associated costs of the receivables’ enforcement up to 85% of their nominal value.
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