Factoring

-
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., 

Comments

Post a Comment

Popular posts from this blog

The Apple's Brand Personality

-
Image
  Apple has a branding strategy that focuses on the emotions. The Apple brand personality is about lifestyle; imagination; liberty regained; innovation; passion; hopes, dreams and aspirations; and power-to-the-people through technology. The Apple brand personality is also about simplicity and the removal of complexity from people's lives; people-driven product design; and about being a really humanistic company with a heartfelt connection with its customers. Apple Brand Equity and Apple's Customer Franchise The Apple brand is not just intimate with its customers, it's loved, and there is a real sense of community among users of its main product lines. The brand equity and customer franchise which Apple embodies is extremely strong.  The preference for Apple products amongst the "Mac community ", for instance, not only kept the company alive for much of the 90's (when from a rational economic perspective it looked like a dead duck) bu...
Read more

FACTORS RESTRICTING INTERNATIONALIZATION OF BUSINESS

-
Image
FACTORS RESTRICTING INTERNATIONALIZATION OF BUSINESS 1.Sovereign political entities Every country has a sovereign political entity. There are more restrictions imposed on them for importing and exporting the goods and services in order to safeguard their national interest. The traders in international marketing have to observe such restrictions. These restrictions include the following.  Imposition of Tariffs and Customs Duties These are levied both on import and export of goods and services in order to make them costly in the importing country and not to ban their entry in to the country completely.  Restrictions on quantities Quantity restrictions are imposed in order to restrict trade in some specific commodities. The main purpose of this restriction is the protection of home country from the competition of the foreign commodities.  Exchange control The government may not ban the entry of goods in the country, but the importer is not allowed to get the necessary foreign excha...
Read more

Disadvantages of Demat

-
Trading in securities may become uncontrolled in case of dematerialized securities. It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors. For dematerialized securities, the role of key market players such as stock-brokers needs to be supervised as they have the capability of manipulating the market. Multiple regulatory frameworks have to be conformed to, including the Depositories Act, Regulations and the various Bye-Laws of various depositories. Agreements are entered at various levels in the process of dematerialization. These may cause worries to the investor desirous of simplicity. There is no provision to close a demat account, which is having illiquid shares. The investor cannot close the account and he and his successors have to go on paying the charges to the participant, like annual folio charges etc.. After liquidating the holdings, many I...
Read more