Meaning of Factoring: Commerce YouTube Lecture Handouts

Get unlimited access to the best preparation resource for competitive exams : get questions, notes, tests, video lectures and more- for all subjects of your exam.

Topics to be covered are

  • Meaning of Factoring
  • Features Of Factoring
  • Functions of factor
  • Types Of Factoring
  • Factoring Procedure
  • Common Factoring Term
  • Advantages of Factoring
  • Disadvantages of Factoring

Meaning of Factoring

  • Factoring is an arrangement, under which a financial institution (called factor) undertakes the task of collecting the book debts of its client in return for a service charge in the form of discount or rebate.
  • The factoring institution eliminates the client՚s risk of bad debts by taking over the responsibility of book debts due to the client.

Features of Factoring

  • Credit cover
  • Cash advances
  • Sales ledgering
  • Collection service
  • Provide valuable advice

Functions of Factor

  • Maintenance of Sales Ledger
  • Financing
  • Credit control and credit Protection
  • Collection of Money
  • Advisory Functions
Illustration 2 for Functions_of_Factor

Types of Factoring

  • Recourse and Non-recourse Factoring
  • Disclosed and Undisclosed Factoring
  • Domestic and Export Factoring
  • Advance and Maturity Factoring

Factoring Procedure

  • The seller sells the goods to the buyer and raises the invoice on the customer.
  • The seller then submits the invoice to the factor for funding. The factor verifies the invoice.
  • After verification, the factor pays 75 to 80 percent to the client/seller.
  • The factor then waits for the customer to make the payment to him.
  • On receiving the payment from the customer, the factor pays the remaining amount to the client.
  • Fees charged by factor or interest charged by a factor may be upfront i.e.. in advance or it may be in arrears. It depends upon the type of factoring agreement.
  • In case of non – recourse factoring services factor bears the risk of bad debt so in that case factoring commission rate would be comparatively higher.

Common Factoring Term

  • Discount rate or factoring fee
  • Advance rate
  • Reserve account
  • Spot factoring

Advantages of Factoring

  • Factoring is a way to finance requirement of working capital of the company in respect of receivables.
  • Factoring provides a large and quick increase in cash flow of the business.
  • Prices are usually competitive due to existence of many factoring companies.
  • Companies might get useful information about the creditworthiness of its customers as factoring firms are specialised in their field.
  • If non – recourse factoring is chosen, there is protection from bad debts.
  • Factoring does not require to risk home or other property as collateral like traditional bank loans.
  • Factoring firms give a cash advance on upto 80 % of receivables, that is more than one would be able to get from a bank.
  • The enterprise can concentrate on manufacturing and selling as a result of factoring services.
  • The factoring institution also provides advice on business trends and other related matters.
  • In India, subsidiaries of four Indian banks- State Bank of India, Canara Bank, Punjab National Bank and Allahabad Bank are providing factoring services.

Disadvantages of Factoring

  • Selling company gets locked with the factor as they rely completely on the services of a factor.
  • Harms Company՚s relationship with their customers.
  • Factoring was considered a sign on the financial difficulties of the company.
  • In the case of non – recourse factoring the factoring company pre approve the selling company՚s customers, which cause delay in placing new orders.
  • The selling company may have to pay extra to remove its liability for bad debts.
  • Some customers might want to deal directly with the selling company instead of dealing with factor.
  • The factor may want to set credit limits for customers, which may affect the way trade is done.

Developed by: