Meaning and advantages of Factoring

We know most of the business entities makes credit sale and they have to do credit investigation before making credit sales, then maintain various documents related to the sales,  They should follow up with the customers on due date for payment. These additional work will take significant time of management as well their attention from core activities.  More over funds are also getting locked with customers and entity should look out for alternate sources to manage their day-to-day operations . We can say these are the core issues associated with credit sales but for all these issues Factoring comes as one stop solution.

 What is factoring?

Factoring is a specialised service related with the task management and it involves credit investigation,  sales ledger management, purchase and collection of debts, credit protection and also provides Finance against receivables.  What happens in factoring is,  Accounts receivables will be sold to a financial institution known as factor and this factor will bear the credit risk associated with the accounts receivables purchased for a Commission. It means factor has purchased all the debtors and they will take the responsibility of monitoring, follow up, collection and risk management related with those debtors.  

By going for factoring firm can convert its accounts receivables into cash without worrying about repayment and this is going to ensure define a pattern of cash flows for the entity.  Also by going for factoring the need for credit department - this will help them to reduce credit related costs and collection cost is also avoided.