“Factoring” is a financial service under which the “factor” undertakes to collect the clients’ debt and offers funds on the basis of accounts receivable which arise as a result of credit sales to the buyers by the sellers. The ‘factor’ collects the service charge by way of discount or rebate deducted from the bills. Though this concept owes its origin to the advanced countries, it can service an important  function in India too. It is an appropriate field of diversification for the India banks to help the sellers in choosing the buyers who seek credit terms to settle their bills.

Factoring can be of two types, namely, (i) With-recourse factoring, and (ii) without recourse factoring. In case of the former, where the constituents do not pay the debts on the due date, the factor will have a right to demand the payment form the client and does not have to proceed legally with the various constituents. In case of without recourse factoring, the factor will have to directly proceed with the various constituents for the default of the payment and cannot demand payment for the client. Therefore, it is not generally preferred by factors. In fact, more than 90 per cent of the factoring business in India consists only of with-recourse factoring as it is found advantageous by factors, that is, financiers.

Merits of Factoring. As a source f finance, factoring offers the following advantages:

(i)    Raising funds through factoring is cheaper than through bank credit.
(ii)    It accelerates cash flow of the business firm which facilitates meeting the current liabilities.
(iii)    It does not create any charge on the assets of the business firm.
(iv)    It provides security for a debt that the firm might otherwise be unable to realize.
(v)    The firm can save time in collecting the debts as the responsibility is transferred to the factor.

For more help in Factoring click the button below to submit your homework assignment