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 ledger
Collection facility/of accounts receivable
Assumption 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 ratio
Reduction of current liabilities
Off balance sheet financingm

 Impact on the balance sheet.