Factoring & Receivables Finance

A company delivers goods and issues an invoice payable in 60 days. It needs the cash now. A factor buys the invoice at a discount and collects from the customer when it falls due.

The critical feature is whose credit is being assessed:

• An ordinary bank loan looks at the borrower — its accounts, its assets, its history.
• Factoring looks at the customer who owes the invoice. A small supplier to a large, creditworthy buyer can raise money on that buyer's quality rather than its own.

That is genuinely useful and genuinely exploitable, which is the theme of the whole product.

The main variants

• Recourse factoring — if the customer does not pay, the seller must buy the invoice back. Cheaper; the credit risk never really left.
• Non-recourse factoring — the factor keeps the loss on customer insolvency. More expensive, and the only version that genuinely transfers risk.
• Invoice discounting — the seller keeps collecting and customers are never told. Preserves the commercial relationship; the factor sees less.
• Reverse factoring (supply chain finance) — the buyer arranges it: suppliers get paid early by a bank at the buyer's credit rating, and the buyer pays the bank later. Everyone gains something, and the accounting is where it gets interesting.

The cost, stated honestly

A 2% discount on a 60-day invoice is not 2%. It is 2/98 × 365/60 ≈ 12.4% annualised. Working-capital finance is routinely quoted in per-invoice terms precisely because the annualised number is uncomfortable — the same presentational trick as the nominal-to-effective conversion.

Reverse factoring and the accounting question

This is where a working-capital tool becomes a systemic one. Under reverse factoring, a buyer extends its own payment terms — 60 days becomes 180 — while suppliers still get paid promptly by the bank. The buyer's balance sheet improves: cash rises, and the obligation is typically classified as a trade payable rather than as debt.

• Economically, the buyer has borrowed. Presentationally, it has been slow paying suppliers. The two look very different in a leverage ratio.
• Disclosure was historically minimal, so an outside analyst could not size the programme. Several high-profile failures — most notably a UK construction group in 2018 and a supply-chain-finance lender in 2021 — turned on exactly this opacity.
• Accounting standard setters have since required disclosure of supplier-finance arrangements. The economics did not change; the visibility did, which is the correct fix.
• The fragility is the reflexivity: if the bank withdraws, suppliers demand original terms immediately and the buyer faces a working-capital call measured in months of purchases. A financing withdrawal becomes an operating crisis in days.

As an investable asset

• Receivables are packaged into ABS and private funds: short duration, granular, self-liquidating, floating rate. The attraction is the same as trade finance and so is the risk profile.
• The dominant risk is fraud and dilution, not default. Invoices that do not exist, are disputed, are subject to set-off, or have been pledged twice. Loss experience in this asset class clusters around documentation failures rather than credit cycles.
• Verification is the whole diligence: confirm invoices directly with obligors, check concentration by buyer, and measure dilution — credit notes and disputes reducing the collectable amount — separately from default.

Where it sits in the credit spectrum

Between trade finance (a bank's promise, documentary) and private credit (a company's promise, term). It is the shortest, most granular and most operationally demanding of the three — and the one where the collateral can evaporate through a commercial dispute rather than an insolvency.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.