Factoring or securitization?

Paola Fasoli Financial risk management guide Leave a Comment

Factoring and securitization for trade receivables are instruments allowing companies to get cash for receivables vis à vis dealers or final customers at time zero.

According to the Italian Legislation, Factoring can be divided into:

a) Factoring where collections are managed by the bank (Factor): “Factoring con mandato all’incasso”;


b) Factoring where collections remain at assignor level: “Factoring senza mandato all’incasso”.

In the first one (Factoring con mandato all’incasso)  sold debtors are requested to pay directly in favor of the factor.

That implies two consequences:

  1. factoring is notified to sold debtors;
  2. servicing is managed by the Factor.

Where the first point might be seen as a disadvantage, it is offset by the second item, which allows companies to outsource a part of their cash management.

It is therefore recommended to companies who wish to outsource servicing and want to move to the Factors the risks of sold debtors (Factoring without recourse, pro soluto).

In the second type of factoring (Factoring senza mandato all’incasso), management and cashing of receivables remains sole competence of the assignor who is fully responsible thereof. It can be transparent vis à vis sold debtors (unless notification is expressly agreed among the parties; in any case only until a pathological fact in the transaction arises) and can be structured with or without recourse (pro solvendo, pro soluto).

In case of factoring without cash mandate, ten days after receipt of collections from sold debtors, cash must be transferred for the benefit of the factor.

Factoring agreements are uncommitted: it means the factor is not obliged to acquire receivables proposed by the seller.

Reporting of sold receivables can be easily structured: an Excel table populated with details of sold receivables (date of the invoice, due date, name of sold debtors) and related collections is sufficient.

Where factoring can be easily structured and does not require specific IT or legal skills, structuring a securitization involves almost all functions of a company: Treasury and/or finance coordinates input from all functions and follows up relationship with the structuring bank. It must produce automatic reports summarizing detailed infos on sold receivables (date of the invoice, aging of sold portfolio, type of related product sold, name of sold debtor, etc.) and on collections.

In factoring structures, the Factor analyses each debtor proposed for sale and sets up ceilings representing maximum funding amount for that specific name. This represents the maximum risk a factor agrees to undertake. In some cases, funding from factor might exceed agreed maximum funding amount: that portion is without recourse, being the risk for non-payment by sold debtors on the seller.


The approach for a securitization is different: analysis is done of sold portfolio as a whole on a mutual basis: its behaviors over three years are analyzed with special attention to payment rates, delinquent receivables, concentration ratios.

The analysis allows structuring bank to set up triggers on the portfolio, e.g. ratios on defaulted receivables, payment rates which must not be exceeded. In case they are not respected an early amortization of the transaction occurs, meaning that no new receivables shall be acquired by the structure and outstanding sold amount amortizes. In some case the agreement requests an early repayment of all outstanding amount (one shot).

Funding from securitization is committed for a minimum period of one year that means that for a period of one year, in case no pathological events occur, each funding entity is obliged to acquire proposed receivables and to pay the purchase price for them.

Agreed purchase price is lower than nominal value of sold invoices; it varies depending on the standing of the originated company (e.g. its rating, if any) and on quality of sold portfolio. The difference between sold and funded portfolio (the credit enhancement) can be reduced with notification of the sale to sold debtors and direct payment of the collections to the structure.

In a securitization, receivables are sold to a special purpose vehicle (SPV) created ad hoc. The SPV issues two types of notes: senior notes funded directly or indirectly by banks and junior notes (sum of credit enhancement, ineligible receivables, excess concentrations) funded by the originated company.

Both factoring and securitization are valid funding alternatives: deciding between them depends on the goals to be achieved, resources, and the relationship with sold debtors.


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