FACTORING

FACTORING

MEANING :

                    Factoring is an arrangement to have debts collected by a third party entity for a fee. Unlike securitization factoring involves transfer of debts, without transferring such debts or financial assets into securities. The debt shall be collected by the factor when they fall due and adjust with the amount of advanced.

TYPES OF FACTORING:

                                                Factoring is classified into two categories on the basis of default of payment by the debtors. When the loss arising from default of debtors is borne entirely by the by the owner is known as “factoring with recourse” and when such loss is borne by the factor is known as “factoring sans recourse”.

PROCEDURE:

·         The firm sells his accounts receivables to the factor.

·         The factor advanced against such receivables.

·         Amount received against the receivables are adjusted against advance.

·         The factor may also provide many other allied services.

ADVANTAGES:

                                      

·         Cost reduction in the area of sales ledger maintenance.

·         Improved liquidity and grater quality of cash flows.

·         Growth is financed through sales and need to inject fresh capital is minimized.

·         Reduce the working capital cycle by slashing receivables.

DISADVANTAGES:

·         The relationship between the company and the client could become strained.

·         It may be interpreted as a sign of financial weakness.