FACTORING: A TOOL OF RECEIVABLES MANAGEMENT

FACTORING: A TOOL OF RECEIVABLES MANAGEMENT

INTRODUCTION

The word FACTOR has been derived from the latin word “FACERE” which means to make or to do.

Factoring is a financial transaction where a firm sells its ACCOUNT RECEIVABLES (invoice) to a third party called a FACTOR at a discounted prices .

Factoring is a financial option for the management of receivables. In others words, it is the conversion of Credit Sales into Cash.

A financial institution (factor) buys the account receivables of a company (client) & pays upto 80% of amount immediately on formation of agreement & remaining amount (balance 20%) to client when the customer pays debt .

PARTIES IN FACTORING

THE SELLER, who has produced the goods & raised invoice

THE BUYER, the consumer of goods & party to pay

THE FACTOR, the financial institution that advances the portion of funds to the seller.

ADVANTAGES OF FACTORING

·      Improved efficiency

·      Improved his credit standing position

·      Flexible to the company

·      Improved cash flow

·      Meet seasonable demands

·      Better purchase planning

·      Saves the management time & effort

·      Avoid bad debts

·      Ensures better management of receivables

·      Improve the liquidity of clients

FUNCTIONS OF FACTORING

·      Maintain Accounts: The factor maintains the client’s sale ledger relating to the receivables & also provide periodic reports .

·      Provision of collection facility: The factor undertakes to collect the receivables on behalf of client relieving the client .

·      Financing: The factor provides advance money to client against outstanding debt of about 80 % & balance minus commission on maturity.

·      Credit Protection: The factoring organization is required to ascertain the creditworthiness & feasibility position of buyer .

·      Advisory Services: The factor is also able to provide advisory service ( financial dealing , extensive credit information ) to client .

MECHANISM OF FACTORING:

1) INTERACTION WITH FUNDING SPECIALIST: The seller interacts with funding specialist / broker & explain the funding needs.

2)   PRELIMINARY CLIENT PROFILE: The broker prepares a preliminary client profile form & submit to funder.

3)  NEGOTIATE CUSTOMISED FACTORING AGREEMENT: Once both party agree that factoring is possible, the broker puts the seller in direct contact with funder for further queries.

4)   LEGAL RESEARCH COST: The seller may be asked to remit fee which incurred during “DUE DILIGENCE”.

5)  DUE DELIGENCE: This is the process by which the buyer’s creditworthiness is evaluated & verified invoices etc.

6)   ACKNOWLEDGEMENT: The seller submits an acknowledge copy of contract to factor for records.

7)  SANCTION LETTER: A detailed sanction letter is given to the seller & their acceptance with required signatories.

8)   DISCOUNTING RATES: The discount rate, charges are fixed at time of contract.

9) SIGNING OF AGREEMENT & INITIAL ADVANCE TO THE CLIENT: Usually within 7 to 10 days of initial contact with factor, agreements are signed , customers are notified , UNIQUE CLIENT CODE & the first advance (80%) is forwarded to company. 

10)   COMPLETION ACTIVITIES:

·      The sellers services or delivers products, thus creating an invoice.

·      The seller sends copy of invoice directly to the factor.

·  The funder verifies the invoice & the advance is sent to the seller as per the agreement

·      The buyer pays the factor, then the factor returns any remaining reserve, minus the fee which has been predetermined in the negotiated agreement.

BILL DISCOUNTING VS FACTORING

BILL DISCOUNTING	FACTORING
It is a provision of finance against the bills .	Factoring includes renders all services like maintenance of ledger , advisory services etc.
Advances are made against the bills .	Trade debts are purchased .
Bill discounting is always with recourse, i.e. in case of default the client will make good the loss .	Factoring may be with recourse or without recourse .
Bill discounting is always disclosed ( acceptor of bill is fully aware )|	Factoring services may be like “undisclosed factoring” are confidential in nature .

CONCLUSION:

 In factoring a company or firm covert its receivables into cash by selling them to a factoring agent or institution at discount. the factor assumes the risk of collection & loss of debts fall on the factor.

Keywords: Client, Factor, Funder, discount, receivables, credit, financing.

Youtube link:

https://youtu.be/fylqApusnBk

AUTHOR:

HIMANSHI CHUGH

(ASSISTANT PROFESSOR, MANAGEMENT DEPARTMENT)