Factoring is a financial service where a business sells its accounts receivables to a third party called a factor at a discount in order to access cash flow. The factor pays the business upfront for the invoices less a discount fee, takes on the risk of unpaid invoices, and handles billing and collection from customers. There are different types of factoring arrangements like recourse, non-recourse, advance, and maturity factoring that determine who assumes credit risk and when payment is made. Factoring provides businesses with working capital and cash flow while transferring some credit and collection responsibilities to the factoring company.

1. Ruban Infant R

2. It is a financial service in which the business entity sells its
receivables to a third party at a discount in order to raise funds.
It involves selling of all the accounts receivables to an outside
agency. Such agency is called as factor.

3. 1. Seller makes Invoices for sales of Goods or Services.
2. Invoices are sold to the Third Party (Factor).
3. The Factors pay the seller after some discount on invoices
(2% to 6%).
4. The Factor does not pay full amount.
5. The Factor only pays 75 to 80% of the invoice value after
discounting.
6. The Remaining will be paid after the payment received from
the Seller’s Customer (Buyer).

4. Functions of the Factor
 Maintenance of Sales Ledger – The factor is
responsible for the Maintenance of the Sales Ledger of
the Client.
 Financing – The Factor finance the client by
purchasing the Accounts Receivables.
 Credit Protection – in case of non-recourse factoring
the risk of bad debt is on the Factor.
 Collection of Money – The Factor performs the Duty of
collecting the funds from the client’s debtors.

5. Types of Factoring
 Recourse Factoring – The Credit risk of the Customers
of the Business is assumed by the business only not by
the factor. The charges only includes components of
interest not the credit risk.
 Nonrecourse Factoring – In this type the business is
not responsible for the credit default. Hence the
commission is higher.
 Advance Factoring – The payment of the money in
advance.

6. Conti…
 Maturity Factoring – It is kind of factoring were the
invoice amount is paid after the realization from the
customer. Less commission.
 Bank Participation Factoring – it a special kind of
factoring where the margin of the factor is also
factored by bank.
 Full Factoring – it is the most popular type. It provides
all types facilities to the client.

7. Conti…
 Domestic & Cross Border Factoring – if the services are
provided within the same country then it is Domestic
whereas if it is international then it is called as Cross
border (Buyer, Seller & Factor).
 Suppliers guarantee Factoring – In this type the Factor
takes the guarantee of the business (Payment to
suppliers). Once the money is realized the factor first
pays the suppliers and from the remaining cuts the
charges.

8. Conti…
 Disclosed & Undisclosed Factoring – In the disclosed
factoring the customer is aware of the Factoring,
whereas in undisclosed factoring the customer is
unaware of the factoring.

9. Advantages of Factoring
 Reduces the credit Risk of the seller.
 The working capital cycle runs smoothly.
 Sales ledger maintenance by factor reduces the cost.
 Improves the liquidity of the organization.

10. Disadvantages
 Client relationship will be questionable.
 The cost of factoring is very high.
 Bad behavior of the factor can affect the company’s
goodwill.