Companies often grant their clients payment terms extending for weeks or months. Consequently, sales appear on the financial statements, but the actual liquidity is delayed. When a company needs to fund raw materials and payroll for the next cycle, it finds itself facing a critical gap between profitability and available cash.<\/p>\n\n\n\n
Factoring bridges this gap by converting outstanding invoices into almost immediate cash. This article explains the mechanics of factoring, its types, how to measure its true cost, its accounting and tax impacts, and when it is the right financing choice.<\/p>\n\n\n\n
A company (the assignor) assigns its outstanding invoices owed by approved clients to a licensed factoring entity (whether a factoring company or a bank). The entity immediately pays a percentage of the invoice value (an advance payment), takes charge of collecting from the client, and then remits the remaining balance to the company after deducting financing and service fees. In Egypt, this activity is regulated by Law No. 176 of 2018.<\/p>\n\n\n\n
The financier\u2019s assessment relies more heavily on the creditworthiness of the debtor client and the validity of the invoice rather than the credit strength of the selling company itself. This makes factoring accessible to companies that may lack sufficient traditional collateral.<\/p>\n\n\n\n
Feature<\/strong><\/td>| Recourse Factoring<\/strong><\/td> | Non-Recourse Factoring<\/strong><\/td><\/tr><\/thead> | Risk of Client Default<\/strong><\/td> | Reverts to the selling company.<\/td> | Borne by the financier (within approved credit limits).<\/td><\/tr> | Cost<\/strong><\/td> | Typically lower.<\/td> | Higher, as it includes the premium for assuming credit risk.<\/td><\/tr> | Potential Accounting Impact<\/strong><\/td> | Similar to a secured loan: receivables remain on the balance sheet, and a liability is recognized.<\/td> | May allow for the derecognition of receivables if risks and rewards are substantially transferred.<\/td><\/tr> | Best Suited For<\/strong><\/td> | Companies with highly reliable clients and consistent collection histories.<\/td> | Companies with credit concentration or those wishing to transfer default risks.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n | Factoring is also categorized into disclosed factoring<\/strong> (where the client is notified of the assignment) and undisclosed factoring<\/strong>, subject to the financier’s terms and the legal framework governing the assignment.<\/p>\n\n\n\n Consider an invoice worth EGP 1,000,000 due in 90 days. (The following assumptions are illustrative):<\/em><\/p>\n\n\n\n The cost represents 6.24% of the invoice value, or about 7.34% of the advanced amount for 90 days, which translates to an annualized rate of approximately 29%. In this example, it is slightly higher than the hypothetical cost of a bank credit facility (25% to 27% annually) and significantly higher than offering a 2% cash discount to the client for paying in 10 days instead of 90 (which equates to roughly 9% annually, assuming the client accepts).<\/p>\n\n\n\n However, the price alone does not dictate the decision. Factoring does not consume the company’s bank credit limit, scales automatically as sales grow, and can transfer credit risk to the financier. Its impact on the cash conversion cycle is profound: with an 85% advance payment on Day 3, the actual average collection period plummets from 90 days to approximately 16 days (0.85 \u00d7 3 + 0.15 \u00d7 90).<\/p>\n\n\n\n Factoring is ideal for companies that sell on credit to large, creditworthy clients, experience rapid sales growth, operate in seasonal industries, or lack sufficient traditional bank collateral.<\/p>\n\n\n\n It is generally unsuitable<\/em> for companies with very thin profit margins that cannot absorb the cost, businesses with frequent invoice disputes, companies with sales fragmented across a massive number of small clients, or those lacking robust, documented delivery and invoicing procedures.<\/p>\n\n\n\n |