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Credit management is a specialised activity, and involves lots of time and efforts of a company. Collection of receivables poses problems, particularly for small scale enterprises. Banks have a facility provide financing receivables but it is for the limited period and the sellers of goods and services has bear a risk of defaults by the debtors. So, a company can assign its credit management and collection to specialised organisation called factoring organisation. Factoring is a popular mechanism of managing, financing and collecting receivables in many countries including India. In India following banks are providing this facility. 1. State Bank of India 2. Canara Bank 3. Punjab National Bank 4. Allahabad Bank
Nature of Factoring
Factoring is a unique financial innovation which provide both financial as well as a management support to the company. Popularly said it is a method of converting nonconvertible, inactive assets in to productive assets by selling receivable to the company that have specialises in collection and administration. It is quite obvious that number of companies have scare resources of cash if it takes a long time to receive payment for goods and services. Such a assets of the company which is non performing which is advisable to sell this receivable and convert this assets in to the performing assets and immediately employ in to the company. IN simple word this process of conversion is called as the factoring. Factoring can be defines as a business involving a continuing legal relationship between a financial institution and a business concern selling goods or providing services to trade customers whereby the factor purchases the clients account receivables and in relation thereto, controls the credit, extended to customer and administers the sales ledger
Factoring Services
Factor also provides the following three basic services to the client while purchasing the receivables from the company. Sales ledger administration and Credit management Credit collection and protection against default and bad-debt losses Financial accommodation against the assigned book debts.
Credit Administration A factor also provides full credit administration services to his clients. He helps and advises them from the stage of deciding credit extension to customers to the final stage of the book debt collection. The factor maintains an account for all customers of items owning to them, so that the collection could be made on doe date or before. He helps clients to decide whether or not and how much credit to extend to customers. He also provides clients with information about market trend, competition and customers and helps them to determine the creditworthiness of customers. Credit collection and protection When individual book debts become due from the customers, the factor undertakes all collection activities that is necessary. He also provides full or partial protection against bad debts. Because of his dealing with a variety of customers and defaults with different paying habits, he is in the better position to develop appropriate strategy to guard against possible defaults. Financial Assistance Often factors provide financial assistance to the client by extending advance cash against book debts. Customers of Client become the debtors of the factor and have to pay to him directly in order to settle this obligation. Thus, Factoring involves outright purchase of debts, allowing full credit protection against any bad debts and providing financial accommodation against the firms book debts. Perhaps, it is like a short term financing mean for the company by selling its books receivables to the factoring organisation with a purpose of taking facilities like credit administration, collection, and protection.
3 Other Services by factor In many countries factors also provides many other services and facilities to the clients which are as below: i. ii. iii. iv. v. Providing information on prospective buyers Providing financial counselling Assisting the clients in managing its liquidity sickness Financial acquisition of inventories Providing facilities for opening letter of credit by the client.
Types of Factoring
The factoring facilities can be broadly classified in to four main groups 1. Full service non-resource 2. Full service resource factoring 3. Bulk/agency factoring 4. Non-notification factoring
5 Amount involves per customer are relatively substantial and financial failure can jeopardise clients business severely. There are large number of customers of whom the client does not have personal knowledge and The client prefers to obtain 100 percent cover under factoring rather than take insurance policy which provides only 70-80 percent cover.
Bulk/agency factoring
This type of factoring is basically used as a method of financing bed debts. Under this the clients continue to administer credit and operate sales ledger. The factor finances the bulk debts against bulk either on resource or without resource. This sort of factoring became popular with development of mini computers market where marketing and credit management was not a problem but the firms needs temporary financing accommodation.
Non-notification factoring
In this type of factoring, customers are not informed about the factoring agreement. It involves the factor keeping the accounts ledger in the name of sales company which the client sells its book debts. It is through this company that the factor deals with clients customers. The factor performs all his usual functions without a disclosure to customers that he owes the book debts of their creditors.
Bibliography
Factoring: Wikipedia.org. (2009, March). Retrieved January 22, 2012, from Wikipedia the free encyclopedia: http://www.wikipedia.org M. Y. Khan and P. K. Jain(2008). Financial Management. New Delhi: Tata McGraw Hill Companies. Pandey, I. M. (1999). Financial Management. New Delhi: Vikas Publication House.