What is Factoring of Receivables?
Factoring is a financing arrangement in which a business sells its accounts receivable to a third party (the factor) at a discount in exchange for immediate cash. Under IFRS 9, the receivable is derecognized only if substantially all risks and rewards have been transferred.
How It Works
- Identify eligible receivables and sell them to the factor.
- Receive immediate cash, less the factor’s discount and fees.
- Assess whether risks and rewards have been transferred to determine derecognition.
- Continue to disclose any retained risk.
Saudi Context
Saudi banks and licensed finance companies offer factoring to SMEs as part of supply-chain finance solutions, often integrated with ZATCA e-invoices.
Example
A company sells SAR 1 million of receivables to a bank at a 4 percent discount, receiving SAR 960,000 in cash and recording a SAR 40,000 financing cost.