Question

What is meant by the following term with reference to the sources of finance?

Factoring

Answer 1

Factoring is a financial service which is rendered by the specialised. Persons known as 'Factors' who deal in realising the book debts, bills receivable, managing sundry debtors and sales. Registers of the commercial and trading firms in the capacity of agent for a commission. The need for factoring arose on account of the inordinate delays faced by suppliers for realising their bills from their customer.

1. Factoring involves selling accounts receivable (invoices) to a third party, known as a factor.
2. Businesses use factoring to receive immediate cash flow by converting invoices into cash.
3. This financial strategy shifts the risk of non-payment from customers to the factor, which takes on the responsibility of collecting payment.
4. Factors charge fees for their services, usually based on a percentage of the total invoice value, with the discount subtracted from the face value of the invoices.
5. Factoring is commonly used in industries with extended payment terms, providing immediate cash flow for businesses in manufacturing, distribution, and services.