Factoring

Factoring involves the outright sale of receivables at a discount to a factor to obtain funds.

There are many companies involved into factoring services like:

SBI Factors & Commercial Services Ltd.Canbank Factors Ltd.

The first private sector factoring company, Foremost Factors Ltd. started operations since the beginning of 1997.

Factoring can be broadly defined as an agreement in which receivables arising out of sale of goods/services are sold by a firm to the factor as a result of which the title of goods and services represented by the said receivables passes on to the factor as a result of which the title of the goods/services represented by the said receivables passes on to the factor.

Hence the factor becomes responsible for the credit control, sales accounting and debt collection from the buyer(s).

In a full service factoring concept (without recourse facility), if any of the debtors fails to pay the dues as a result of his financial inability/insolvency/bankruptcy, the factor has to absorb the losses.

Credit sales generate the factoring business in the ordinary course of business dealings.

Realisation of credit sales is the main function of factoring services.

Once a sale transaction is completed, the factor steps in to realize the sales.

Thus the factor works between the seller and the buyer and sometimes with the sellers banks together.

What is a factor?A factor is a financial institution that specializes in purchasing accounts receivables from business firms.

Functions of a Factor Financing facility/trade debts Maintenance/administration of sales ledgerCollection facility/of accounts receivableAssumption of credit risk/credit control and credit restriction; and Provision of advisory services.

Advantages & Evaluation Additional source Reduction of cost & expenses More time for planning and production Improved efficiency Higher credit standing Improvement in current ratioReduction of current liabilities Off balance sheet financingm

Impact on the balance sheet.