Factoring in detail

Factoring is defined as a financing technique which involves a financial agreement between 2 parties, namely, factor & a client in which  the firm (client) gets advances in return for receivables, from a financial institution (factor).

A factor is essentially a funding source that agrees to pay a company the value of an invoice less a discount for commission and fees.

It is also known as accounts receivable factoring or invoice factoring.

Companies choose factoring if they want to receive cash quickly rather than waiting for the duration of the credit terms. It helps the companies to fulfill their financial obligations by providing immediate funds.

PROCESS OF FACTORING

Factoring, basically involves an agreement between the factor & the company in which the factor agrees to purchase the client’s Account Receivables & pay upto 80 – 85% of the invoice value immediately.

 The company gets the balance amount (including finance cost & operating cost) when the customer has paid the invoice to the factoring company.

The Factoring company also charges “factoring fee” which is a percentage of the amount of receivables factored.

TYPES OF FACTORING

The various types of factoring are classified below :

RECOURSE FACTORING – In this type of arrangement, the financial institution, can resort to the firm, when the debts are not recoverable. So, the credit risk associated with the trade debts are not assumed by the factor.

NON – RECOURSE FACTORING – In this type, the factor has to bear the loss arising on account of irrecoverable receivables . He can only charge high commissions as compensation but not claim any refund.

DISCLOSED FACTORING – In disclosed factoring, the name of the factor is disclosed in the invoice by the supplier of the goods asking the buyer to make payment to the factor.

UNDISCLOSED FACTORING –  The form of factoring in which the name of the factor is not mentioned in the invoice issued by the manufacturer is called undisclosed factoring.

DOMESTIC FACTORING – In this type, the parties involved in the arrangement i.e the factor, client & the customer are from the same country.

EXPORT FACTORING – In this type of factoring, the parties involved i.e. exporter (client) , the importer (customer) , export factor & import factor reside in different countries. It is also known as cross border or international factoring.

ADVANCE FACTORING – In advance factoring, the factor gives an advance to the client, against the uncollected receivables.

MATURITY FACTORING – In maturity factoring , the factor does not make any advance payment to the client. The payment is made either on the date of collection or on a guaranteed maturity date.

Thus, the collection of debt is done by the factor or the client depending upon the type of Factoring arrangement.

Accounting & Finance for Banking

Principles & Practices of Banking Module E Pdf

Free
Module E PPB ePDFs available in our android app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Leave a reply

Please enter your comment!
Please enter your name here

Popular

Free Live Classes

spot_img

More from author

All about KYC/AML Exam by IIBF

All about KYC/AML Exam by IIBF The KYC/AML is a professional certification exam in Anti Money Laundering and Know your customer conducted by the Indian...

CCP- Certified Credit Professional Course by IIBF

IIBF CCP (Certified Credit Professional) exam is an All-India Exam directed by the Indian Institute of Banking and Finance (IIBF) to select competent candidates...

What is Digital Banking in Detail

Digital Banking is the automation of traditional banking services. It is defined as banking done through the digital platform, doing away with all the...

Digital Banking Course By IIBF

Digital Banking Course By IIBF Certificate course in Digital Banking is conducted by IIBF to provide practicing bankers a sound foundation in the digital banking...