• Preamble

    Debt factoring and invoice discounting is the assignment of debts for consideration. The debt is sold to the debt factor for a price that is less than the face value of the debt. The difference between the face value and the purchase price is often called a factoring service fee. In commercial practice the term debt factoring is loosely used to also mean invoice discounting. Although there may be a difference between these two activities, for the purposes of these frequently asked questions we will just use the term debt factoring.

    Also, for the purposes of these frequently asked questions, the assignment of the debt involves the disposal by the assignor of all (or part) of the right, title and interest in the debt to the debt factor.

    Debt factoring assignments fall into two categories: recourse debt factoring and non-recourse debt factoring.

    Non-recourse debt factoring

    Non-recourse debt factoring is less common than recourse debt factoring. Under non-recourse debt factoring the debt factor acquires the debt at his own risk. That is, if the debtor does not pay the debt factor, the debt factor does not have recourse to the assignor for any amounts outstanding and so stands to lose the amount of the unpaid debt.

    Recourse debt factoring

    Generally, under a recourse debt factoring agreement:

    • the assignor and debt factor enter into an agreement whereby, for the term of the agreement, the assignor offers debts that are due (or that will become due) for sale to the debt factor
    • the debt factor has the discretion to accept or reject the offer
    • if the offer is accepted by the debt factor, the debt factor purchases the debt at a price less than the face value of the debt (the difference being the factoring service fee). Under some agreements, the debt factor pays the purchase price to the assignor when the debtor has paid the debt factor, but this may not always be the case
    • the debt factor can reassign certain debts back to the assignor – for example, where the debtor disputes or does not pay the debt, or where a payment instrument of the debtor (such as a cheque) is dishonoured.

    For both recourse debt factoring and non-recourse debt factoring, the assignor will normally be making a financial supply when it assigns the debt (or a part of it) to the debt factor.

      Last modified: 24 Jun 2015QC 16359