Details about Factoring - Advantages and Functions

DETAILS ABOUT FACTORING - ADVANTAGES & FUNCTIONS

Essential for All Upcoming Bank Exams

Introduction:
The arrangement in which short-term domestic receivables on the sale of goods or services are sold to a company (known as FACTOR), is called, factoring which was introduced during 1991 on the Report of Kalyanasundrama Committee.

Functions:
The FACTOR performs the functions such as –

• Submitting sales account to the creditors; 
• Purchase of Receivables; 
• Collection of debt on due dates; 
• Maintaining the sales account to the creditors; 
• After collection, to return the reserve money to the seller and provide consultancy services to the customer. 

Advantages of Factoring: 

• Dealers also get rid of the receivables collection. 
• Sales are virtually in cash sales. 
• Its functional capital management achieves efficiency, which reduces its costs and improves the chances of good profit. 
• Money available with the lenders is available for business. 

The process of Factoring:

• FACTOR recovers the amount from a buyer on the due date. 
• Seller discounts these receivables with a FACTOR by assigning the receivables. 
• Seller sells goods on a short-term credit basis. 
• FACTOR purchases the receivable on with or without recourse basis. 
• Buyer accepts the bills raised by the seller. 

With or without recourse:
If non-payment loss is borne by the factor it is called without recourse factoring. If risk can be transferred back to the seller, it is called with recourse factoring.