![]() The definition of factoring is when a business sells its invoices - also known as accounts receivable - to another company for immediate cash or financing. Read on to learn more about finance factoring and how it can open opportunities for success. Finance factoring is an increasingly popular solution to this common challenge - Trade Finance Global found a 12.6% increase in factoring and receivables in 2021.Įngaging in factoring means your business gains the benefits of immediate cash without spending time and resources pursuing payment from its customers and clients. ![]() Yet late invoice payments can sometimes make it challenging to purchase supplies, pay debts and maintain regular business operations. The factoring procedure is simple and easy than applying for a bank loan, it saves time, money and effort.Managing your business’s cash flow is essential to growing your business and meeting customer demands.It allows customers to purchase expensive products through flexible credit schemes.It allows customers to save bank charges and expenses.It acts as an additional source of finance for the client and allows him to explore new markets.It reduces the financial burden of the client and relieves him maintaining accounts and collection of receivables.It allows the client to offer lucrative credit schemes to customers and increase his sales and profit.It protects the client against credit risk i.e.The client gets immediate cash on sale which can be invested somewhere else.Remits the balance (20%) from the money collected to the client/seller after deducting its commission, fees, service charges etc.Receives payment from customer/buyer on due date.Prepares and sends periodical account statements to customer.Makes an advance payment to factor on receiving all the documents (invoice, challan, agreement etc.).Receives payment in advance up to 80% of cost of good by the factor.Hands over the documents to factor (Financial institution/Banking Institution).Prepares invoice, delivery challan, factoring agreement and other documents. ![]() Sells goods on credit to buyer/customer.It starts with a credit sale and agreement between the client and the buyer/customer.Providing Collection Facilities – Collect money on behalf of the client and remits the money back after deducting his chargesĪ Factoring contact for sale of receivables –.Providing Credit Protection – Protects the client against bad-debts/non-payment.Providing Short-term Finance – Provide money in advance up to 80% of the receivables.Providing advisory services – Advices the client regarding credit worthiness of a buyer, potential customers, market trends etc.Maintaining Accounts – Preparing and updating sales ledger and providing periodic reports with useful information.The Factor, The Client (sells receivables to factor), Customer (pays to factor) Functions of a Factor: Through factoring an organization (client) relieves itself from the procedures and expenses of collecting receivables arising out of a sale and receives immediate cash to finance its business operations.Ī factoring agreement involves three parties: It is an arrangement between a factor and his client which includes any two of the following services provided by the factor to the client – Factoring is a financial transaction between two parties, client and a factor, in which the client sells its accounts receivable (Money owed to client by a buyer) to the factor to receive money immediately in exchange.įactoring is an agreement in which receivables arising out of a sale of goods/services are sold by a firm (client) to the factor (financial intermediary) as a result of which the title of goods/services represented by the receivables passes on to the factor.
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