The recession caused by the Covid-19 epidemic has once again stretched commercial invoice payment times. According to Intrum's European Payment Report, 35% of European companies have experienced a delay in invoice collection in 2020.

However, the number of SMEs resorting to invoice factoring also increased. Factoring allows companies to free up liquidity tied up in accounts receivables by assigning them to a factor before they fall due; the assignor receives the amount of the transferred receivables immediately, net of a commission fee.

Debtor insolvency risk: who pays?

By assigning invoices, companies can immediately obtain the liquidity they need to carry on business activities. Factoring costs mainly depend on two elements: the credit risk associated to the transaction and the party on whom that risk falls in case the debtor delays payment or turns insolvent.

There are two possible scenarios, depending on the contract:

• with non-recourse factoring: the assignor is not liable for the debtor's insolvency and the credit risk is transferred to the factor.
• with recourse factoring: the credit risk burden the assignor, who will be liable for any non-payment of the debtor.

By non-recourse factoring the debt collection is fast and secure. On the other hand, commission costs will be higher. 

Factoring or invoice trading?

The higher the risk of the debtors' insolvency, the higher the commission charged. In order to determine the commission fee, the factor will therefore assess the assignor's client portfolio, measuring the risk of the transaction on the basis of the debtors' credit score and the duration of the receivables.

The analysis can also be carried out by the assignor itself by analysing its client portfolio with s-peek.

Knowing the credit score of each debtor help the company identify which receivables to assign.

The company may be faced with two opposite situations:

• a portfolio of companies with a good credit score (from BB upwards): the assignor could opt for a recourse contract, benefiting from lower commission costs.
• a portfolio characterised by companies with bad credit score: a non-recourse contract would allow the assignor to transfer the credit risk to the factor and immediately collect the debt, net of commission costs.

In this case, however, the factor may not grant the non-recourse. The analysis of the client portfolio also help the company assess which lender to turn to. In addition to banks or factoring companies, companies can also resort to  invoice trading, selling their invoices to an online community of investors via dedicated web platforms. Unlike factoring companies, which usually require the sale of an entire bundle of receivables, invoice trading allows the company to sell single invoices to the best buyer and receive around 90% of the nominal value of the receivable immediately. Which method best suits theassignor's needs and which receivables assign, can be determined only by the analysis of the client portfolio.