Factoring

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Factoring
            Factoring can be defined as an agreement in which receivables arising out of sale of goods/services are sold by a firm (Client)  to a financial intermediary (Factor), as a result of which the title of the goods and services represented by the  said receivables passes on to the Factor. A Factor then becomes responsible for all credit control, sales accounting and debt collection from the credit customers. Thus under factoring the seller does not maintain a credit / collection department. After each sale a copy of the invoice and delivery note, the agreement and other related papers are handed over to the factor. The factor in turn receives payment from the buyer on the due date as agreed, where the buyer is reminded of the due date payment account for collection. The factor then remits the money collected to the seller after deducting and adjusting its own service charges at an agreed date. Thereafter the seller closes all the transactions with the factor. Under factoring arrangements, while making credit sales, the invoice is made in the name of the factor. The receivables then become the assets of the factor as the client’s debts are purchased by the factor.

Advantages of Factoring
  • Administrative Cost savings for the client
  • Helps to improve the operating leverage
  • Enhances liquidity of the firm by ensuring efficient working capital management
  • Factoring brings better credit discipline amongst customers due to regular realization of dues
  • Accelerated cash flows help the client to meet liabilities promptly
  • Factoring facilitates prompt payments and credits by providing insurance against bad debts
  • Allows  for promotion of linkages between bankers and factors
  • Allows for reduction in uncertainty and risk associated with the collection cycle
Disadvantages 
·         Engaging a factor may be reflective of the inefficiency of the management  of the firm’s receivables
·         Factoring may be redundant if a firm maintains a nationwide network of branches
·         Difficulties arising from financial evaluation of clients
·         A competitive cost of factoring has to be determined before taking decision about engaging a factor
Functions of a Factor
1.      Maintenance/ administration of sales ledger
2.      Collection facility of accounts receivables
3.      Financing facility trade debts
4.      Assumption of credit risk, credit control and credit protection

5.      Provision of advisory services though providing information about customers perception of the client’s products, marketing strategies, emerging trends, procedures to be followed in invoicing, delivery, and dealing with sales returns, etc., 

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