Factoring

Pay as paid or Maturity factoring

 

Under the factoring arrangement, the factor will have to pay the debt to the client at an agreed date. This could be when the debtor pays which is known as pay as paid factoring or at a predetermined date which is known as maturity payment factoring.

Pay as paid

In pay as paid arrangement, the factor is required to pay to client as and when the debtor makes the payment.  Prior to the payment by the debtor, the factor can give an advance and discount charge is levied on the advance taken.The discount charge or interest is levied from the date of advance to the date of debtor payment. Discount charge ceases to accrue once the debtor made the payment. This method is commonly used in Singapore and it is easier to understand.

 

Maturity payment

In maturity payment, the factor is required to make payment at the pre-determined date called the maturity date. The factor may make advance prior to the maturity date. Discount charge will accrue from the date of advance to the maturity date. Hence, the discount  for advance made will accrue from the date of advance to the date of maturity date whether the debtor pay or not . The maturity date is established based on the DSO ( day sales outstanding) at the time when the factoring agreement is signed. However this will be adjusted either monthly or quarterly based on the monthly or quarterly DSO.

In the maturity payment, the factor will make a gain when the customer payment is earlier than the maturity date. However, the factor will make a loss if the debtor payment is later than the maturity date.

Some factors however, use debt turn interest adjustment to overcome the again or loss. This is done by daily comparison of  the debt purchase account outstanding  and the sales ledger control outstanding.

If the debt purchase account outstanding  is higher than the sales ledger control outstanding , it means that the customer is making payment earlier  than the maturity period and hence debt turn adjustment interest will be in clients favour.

If the debt purchase account outstanding  is lower than the sales ledger control outstanding  , it means that the customer is making payment later that the maturity date . In this case, the debt turn adjustment interest will be made in favour of the factor.

 

 

Old line and maturity factoring

The maturity payment type should not be mixed up with the maturity factoring concept used in the US. In the US, maturity factoring means factoring with no advance.

Factoring with advance is known as old line factoring.