It is a transaction in which a business sells its accounts receivables, or invoices, to a third party, at a discount, known as a “Factor”.
- It was introduced in the country in 1989.
- The exporter assigns his account receivables in the favor of the factor & give notice of assignment to the debtor.
- The factor also provides you back-office support.
- The factor undertakes collection/accounting & management of debts of their clients.
- Factoring is sometimes called as “Accounts Receivable Financing”
- Most factoring companies will purchase your invoices & advance you money within 24 hours.
- At first, they will pay you 80-90% of the a/c receivable or invoice value.
- Once they receive the payment from the buyer they will pay you the balance amount after deducting the fees.
- The factor may either lend against the account receivables or purchase the invoice.
- The financing doesn’t show up on your balance sheet as debt.
- Factoring is based on the quality of your customer credit, not your own credit or business history.
- Factoring provides a line of credit based on sales, not your company’s net worth.
- Factoring allows you to concentrate on your core business rather than running for difference source of funds.
There are two types of factoring in practice.
- Factoring for Domestic sales
- Factoring for Export sales
- Full Factoring
- Recourse Factoring
- Maturity Factoring
- Advanced Factoring
- Undisclosed Factoring
- Invoice Discounting
- Single Factoring System
- Direct Export Factoring
- Direct Import Factoring