Discuss the concept of factoring ? how does it work ?

Answer 1

Factoring is often referred to as accounts receivable factoring as the finance provided by factoring is made specifically against the accounts receivables. It can also be referred to as invoice finance or invoice factoring as it is each individual invoice that is assigned to the factoring company.

Basically what it is is you sell your customers' invoices to a factoring co. at a discount. Let's say you issued a sale invoice for $5,000 to a customer due in 60 days. But you need the money NOW, so you assign this invoice to the factoring co. They'll give you, say 85% of the invoice amt, i.e. $4,250 now. But they charge you interest on this "loan" of $4,250 from the time they give you the cash until the time your customer pays them the $5,000. In addition to charging you interest, they also charge you an admin fee or levy for all the tracking and paperwork.

Factoring can be with recourse or without recourse. With recourse means if the customer doesn't pay up after 60 days, the co. comes to you to get back the money it "loaned" you. Without recourse means it can't do that. It effectively carries the risk of bad debts, but of course the interest they charge is higher, to cover its risk.

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Answer 2

Concept Of Factoring

Answer 3

Factoring is not a loan; it does not create a liability on the balance sheet or encumber assets. It is the sale of an asset--in this case, the invoice. And while factoring is considered one of the most expensive forms of financing, that's not always true. Yes, when you compare the discount rate factors charge against the interest rate banks charge, factoring costs more. But if you can't qualify for a loan, it doesn't matter what the interest rate is. Factors also provide services banks do not: They typically take over a significant portion of the accounting work for their clients, help with credit checks, and generate financial reports to let you know where you stand.

Answer 4

Debtor factoring (sometimes called debt factoring) is a financial product (or facility) and a form of invoice finance. It is a working capital solution whereby a factoring company (also known as a factor) will provide you, their client, with up to 95% (this can be 100% in some cases) of the value of your outstanding sales invoices (also known as accounts receivables, or your sales ledger) e.g. with outstanding unpaid sales invoices of £120,000 an early payment of 85% could release an initial cash injection of over £100,000. This releases working capital that will improve the cash flow of your business enabling you to pay creditors and use that cash for expansion and growth. In some cases overpayments in excess of that value can be provided.

The factor will then continue to provide you with up to 95% of the value of new sales invoices, normally within 24 hours of you raising them. The other 5% of the value of your sales invoices is passed onto you when the customer (also known as a debtor) pays.

In addition, the debt factoring company can undertake the task of chasing and collecting your outstanding unpaid debtor sales invoices, saving you time and money. With Confidential Factoring the factoring company will chase customers in the name of your company. The factoring company will send out debtor statements, chasing letters (also known as dunning letters) and will also contact debtors by telephone. Factoring companies are experts in this area and so they are likely to be able to improve the speed at which your sales invoices are paid through effective collections techniques, further improving your cash flow. The factor may also be able to provide these services in respect of export sales.