Factoring
The sale of trade receivables to an institution that advances their amount and handles collection, often backed by credit insurance whose benefit is transferred to the factor.
Factoring is a financing technique by which a company sells its customer invoices to a specialized institution, the factor, which immediately advances most of their amount, handles collection and, in its non-recourse form, bears the default risk. It thus turns receivables into immediate cash and outsources management of the receivables ledger. It has a close relationship with credit insurance. To cover buyer default risk, the factor can bear it itself, require the company to buy a credit insurance policy whose indemnities are assigned to it, or insure itself. In the second case, the credit limits granted by the insurer directly determine the amount the factor will finance on each buyer, so that a limit reduction immediately lowers the financing available. For the credit insurance underwriter, a factor's presence changes the relationship: it must make sure the assignment is valid, that declarations remain accurate, and that third-party collection does not reduce recovery prospects.
Textbook case: a company sells to a factor 2 million euros of invoices on 150 customers and immediately receives 1.8 million. Its credit insurance policy is assigned to the factor; when the insurer cuts the limit on a large customer from 300,000 to 100,000 euros, the factor reduces financing on that customer's invoices by the same amount.
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