What is the difference between securitization and factoring

Kevin Link. Very good post. Simple and to the point. Register now or log in to join your professional community. Factoring is purchase of receivables book debts of a company and liquidate theses receivables to manage the company's cash flows and is with or without recourse.

While securitisation is a process to convert illiquid assets into liquid assets by converting longer duration cash flows into shorter duration cash flow and is without recourse. Securitisation: A loan mortgage company will have long term borrowers in its "Receivables" who will pay in installments. Inorder, to unblock these fund, the company will sell these receivables to a "SPV special purpose vehicle at a discount, who in turn issues bonds on security of these receivables.

The business gets its money straightaway, and when the customers finally pay, the investors get their own money back. If, among the outstanding receivables, a part of the debt is not collected, this risk is assumed by the investors, not the company which issued the securities. Therefore, securitisation is better suited to large companies which process large amounts of receivables.

For that reason, accounts receivable securitization is available only to larger companies with millions of dollars worth of receivables. However, smaller companies can convert accounts receivables to cash through a process called factoring. In a factoring arrangement, a company sells its receivables directly to a third party, usually at a significant discount. The company gets money upfront, much like in securitization, and the buyer of the receivables -- called the factor -- typically assumes the risk of nonpayment.

How much the factor pays for the receivables, in terms of cents on the dollar, depends on the age of the receivables. The longer a receivable has been outstanding, the more likely it is to go uncollected, so the less the factor is willing to pay. Factors often provide other services, including consulting and collections. Cam Merritt is a writer and editor specializing in business, personal finance and home design.