Factoring allows companies to convert their unpaid invoices into immediate cash flow. This provides operating capital for daily expenses and growth. Factoring is beneficial for new businesses and those needing quick access to funds. However, factoring comes at a higher cost than loans, charging interest rates from 1-4% of invoices plus additional fees. Over-reliance on factoring can harm customer relations and business management. Factoring first began in India in 1991 and is growing as a source of short-term financing, but adoption has been limited by bank reluctance and high transaction costs.

2.  The first Step : We all know that companies needs money
to operate and pay employees. To do so they need to have
some credit in their account but things don’t seem feasible
when you are new in business and you are operating a small
enterprise. For this companies seek factoring a safer option
rather than waiting long time for the profit to come as
immediate profit is not possible.
 Secured Financial Assets: Usually it takes about two to
three months for a company to get profit of its investment.
Which may seem a long time if financial situation is not
good. Factoring in this case may help secure financial assets.
Factoring coverts companies invoice into money that’s is
need for the bread and butter or employees and healthy
growth and running of the firm

3.  Cash flow management: For businesses, factoring
provides a solution to managing cash flow. Factoring
provides cash for the majority of the invoice value
within a matter of hours or days.
 Tax benefits: Factoring is a potential source of tax
issues for businesses. According to the Internal
Revenue Service, some companies use factoring from
foreign providers to avoid tax liability.
 Time factor: Factoring makes it possible to gain profit
and return in much lesser time and enabling the firm
to reinvest and gain further cash. A lot of time and
effort is saved.

4.  Supplementary Funding: Factoring may serve as
source of additional funding for a firm that needs cash
to grow and make its name.. On the other hand loans
and money borrowers may not be as ready to give away
money as factoring firm plus a lot of paper work
credential statements.
 The last Chance factor: There may come some times
in business where a firm that has been doing great
suffers some bad blows and time does not goes well for
them. As a last chance and the only resort the
companies seek refuge in factoring as it may help
enough needed by the operators to make an attempt to
regain the strength. Factoring in this case not only
provides monetary support but also sufficient time to
do whatever one can to sustain the survival.

5. FACTORING CONS
 The Cost: While it may be necessary to have immediate
access to cash, it will come at higher price than loans.
Factoring companies usually keep between 1% and 4% of a
receivable as their fee. Additionally, they charge interest on
the cash advance, typically at prime rate plus 2%. That all can
add up to more than 30% in annual interest.
 Over-reliance on a factoring company can result in excessive
trading and mismanagement.
 Over-reliance on a factoring company can also result in loss
of direct customer relations.

6.  Possible harm to customer relation.
 Rights of the factor resulting from
purchase of trade debts are uncertain, as
compare to bills of exchange.

7. WHY FACTORING HAS NOT
BECOME POPULAR IN INDIA
 Banks’ reluctance to provide factoring services
 Bank’s resistance to issue Letter of Disclaimer
(Letter of Disclaimer is mandatory as per RBI
Guidelines).
 Problems in recovery.
 Factoring requires assignment of debt which attracts
Stamp Duty.
 Cost of transaction becomes high.

8. Development of factoring in india
 The first Factoring business was incorporated in India
on Feb. 1991 by SBI Factors, a subsidiary of State Bank
of India with an asset base of Rs. 919.36 crore as on
March 31, 2006.
 The SBI and its 2 associates banks have a 70% stake in
SBI Factors while 20% is held by SIDBI and 10% by
Union Bank of India.
 Can Bank Factors(1991) is leading Factors company
with a factored turnover of over 2.592 crore.
 Punjab National Bank is operating in northern India