Three distinct things hide behind a commercial receivable: the risk of not being paid, the work of recovery, and the financing of the wait. An exporter can keep all three, hand over one, or hand over all; and the recurring error is to believe that a product taking one takes them all. Credit insurance takes the risk, leaves recovery and finances nothing. Factoring takes recovery, finances, and takes the risk only in some formulas. Two earlier modules dealt with the circulation of the receivable and with outright sale; here we take the case where the receivable is kept but everything around it is handed over.
One must therefore start by unfolding these three functions, because a factoring price reads that way and no other. The factoring commission pays for managing the ledger, chasing, applying payments and contentious recovery; the financing commission pays for the cash advance and follows rates; and where the contract is without recourse, a third element pays for taking the risk. An exporter comparing factoring to an insurance policy on total cost alone compares a service to a cover, and will find factoring expensive without seeing that it is buying a service nobody else provides.
The commonest form in international trade deserves precise attention, because it stacks the two techniques: the factor finances and manages, the insurer carries the risk, and the factor takes an assignment of the policy's benefit. One then has a three-cornered construction where each depends on the others' conduct. The factor is paid by the insurer if the debtor defaults, but only if the insured met its obligations, which it no longer performs itself since recovery has been delegated. The question to write down before signing is that one: who notifies the overdue within the policy's period, the transferor that no longer sees the payments, or the factor that is not the insured.
This is the first place where the two logics conflict, and it produces whole losses. A policy's notification periods are short and run from maturity; a factor's circuit places the information with itself first, and passing it back to the transferor and then to the insurer consumes weeks. An overdue notified out of time brings the cover down, and there is then neither insurer nor factor to bear the loss, since the latter turns back on the transferor under the assignment's warranty. The remedy is contractual and simple to write: a duty of direct notification by the factor, with an internal period shorter than the policy's.
The second friction point concerns recovery, and it is subtler. The policy requires diligence the insured no longer controls: it is the factor that chases, that decides on litigation, that grants or refuses time. Yet interests diverge. The factor handles thousands of files with standard procedures and an internal deadline; the insured has a commercial relationship to preserve and a claim file to document. Slack recovery, or conversely premature proceedings, are both raised against the insured although it decided neither. What protects is a written right of oversight on recovery decisions above a threshold.
The third point is accounting and often decides the choice. Non-recourse factoring, with effective transfer of risk, allows the receivable to leave the balance sheet; factoring with recourse, or with even a limited residual recourse, does not, and the advance received is a financing on the liabilities side. Exporters regularly discover at year end that the chosen structure does not produce the expected balance sheet effect, because a warranty clause or a holdback was enough to keep the risk with them. The question is put to their auditors before signature, not after.
What is retained is an assembly method rather than a choice between two products. First separate the three functions and say which are to be handed over. Then check that the chosen structure answers four written questions: who notifies and within what period, who decides on recovery and how far, who is indemnified, and who answers for the policy's obligations. Finally ask, before signing, whether the balance sheet effect sought is actually produced. The two techniques combine very well where those four answers exist, and very badly where they are assumed to be obvious.
A components exporter hands its export ledger, 18 million euros a year, to a factor, with financing and recovery management, and assigns it the benefit of its existing credit insurance policy. The policy requires any overdue to be notified within forty-five days of maturity. The factor's circuit provides for a first chaser at fifteen days, a second at thirty-five, referral to litigation at seventy-five, and a monthly statement sent to the transferor on the 10th of the following month. An Italian buyer of 1.2 million falls due on March 8 and does not pay. The exporter learns of it on May 10. The insurer declines the claim. Who bears what?
The insurer's refusal is well founded and nobody was at fault in the ordinary sense: each followed its circuit, and it is the assembly of the two circuits that is wrong. The March 8 maturity opened a notification period expiring on April 22; the factor's monthly statement informed the transferor only on May 10, eighteen days too late, and the transferor is the only party able to notify since it is the insured, the factor being merely the beneficiary. The cover falls for late notification on a perfectly valid receivable. The loss does not stay with the factor for all that: it will turn back on the transferor under the assignment's warranty, so the 1.2 million returns to the exporter, which has paid for a policy, paid a factoring commission, and is covered by nothing. Two clauses would have sufficed and they are written before signature. A duty of direct notification by the factor to the insurer, with an internal period appreciably shorter than the policy's forty-five days, say thirty; and a right of oversight for the transferor on recovery decisions, because referral to litigation at seventy-five days is not necessarily the diligence the insurer expects, nor what the commercial relationship can bear. The question to put to the structure is not what it costs but who notifies, within what period, who decides on recovery, and who answers for the policy's obligations.
- 01A receivable carries three separable things: risk, recovery and financing, and no product takes all three by nature.
- 02Insurance takes the risk and leaves recovery; factoring takes recovery and finances, and takes the risk only without recourse.
- 03The common structure stacks both: the factor is beneficiary but the insured remains the transferor, which alone can notify and no longer sees the payments.
- 04A monthly chasing circuit is slower than a policy's notification period: it is the assembly that loses the claim, not a fault.
- 05The balance sheet effect sought occurs only with effective transfer of risk: a warranty clause is enough to keep it with the transferor.