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Factoring: Factoring Is A New Financial Service That Is Presently Being Developed in India | PDF | Factoring (Finance) | Credit (Finance)
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Factoring: Factoring Is A New Financial Service That Is Presently Being Developed in India

Factoring is a financial service where accounts receivables are sold to a factor, or financial institution subsidiary of a commercial bank. The factor then takes responsibility for monitoring, collecting, and bearing the risks of those receivables in exchange for commission. Factoring offers businesses advantages like converting receivables to cash without having to worry about repayment, ensuring a steady cash flow pattern, and eliminating the need for a credit department. However, factoring is a relatively expensive source of financing compared to normal lending rates.

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Charu Modi
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76 views1 page

Factoring: Factoring Is A New Financial Service That Is Presently Being Developed in India

Factoring is a financial service where accounts receivables are sold to a factor, or financial institution subsidiary of a commercial bank. The factor then takes responsibility for monitoring, collecting, and bearing the risks of those receivables in exchange for commission. Factoring offers businesses advantages like converting receivables to cash without having to worry about repayment, ensuring a steady cash flow pattern, and eliminating the need for a credit department. However, factoring is a relatively expensive source of financing compared to normal lending rates.

Uploaded by

Charu Modi
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Factoring: Factoring is a new financial service that is presently being developed in India.

Factoring involves provision of specialised services relating to credit investigation, sales ledger management, purchase and collection of debts, credit protection as well as provision of finance against receivables and risk bearing. In factoring, accounts receivables are generally sold to a financial institution (a subsidiary of commercial bank-called Factor), who charges commission and bears the credit risks associated with the accounts receivables purchased by it. Its operation is very simple. Clients enter into an agreement with the factor working out a factoring arrangement according to his requirements. The factor then takes the responsibility of monitoring, follow-up, collection and risk-taking and provision of advance. The factor generally fixes up a limit customer-wise for the client (seller Factoring offers the following advantages which makes it quite attractive to many firms. (1) The firm can convert accounts receivables into cash without bothering about repayment. (2) Factoring ensures a definite pattern of cash in flows. (3) Continuous factoring virtually eliminates the need for the credit department. That is why receivables financing through factoring is gaining popularly as useful source of financing short-term funds requirements of business enterprises because of the inherent advantage of flexibility it affords to the borrowing firm. The seller firm may continue to finance its receivables on a more or less automatic basis. If sales expand or contract it can vary the financing proportionally. (4) Unlike an unsecured loan, compensating balances are not required in this case. Another advantage consists of relieving the borrowing firm of substantially credit and collection costs and to a degree from a considerable part of cash management. However, factoring as a means of financing is comparatively costly source of financing since its cost of financing is higher than the normal lending ra The differences between Factoring and Bills discounting are as follows: (i) Factoring is called as .Invoice factoring. whereas bills discounting is known as .Invoice discounting. (ii) In factoring the parties are known as client, factor and debtor whereas in bills discounting they are known as Drawer, Drawee and Payee. (iii) Factoring is a sort of management of book debts whereas bills discounting is a sort of borrowing from commercial banks. (iv) For factoring there is no specific Act; whereas in the case of bills discounting, the Negotiable Instrument Act is applicable.

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