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Factoring

Factoring is an alternative form of financing it helps in protection against losses on receivables. Factoring is a financial transaction in which a business sells its accounts receivable. Factoring is a financial transaction in which a business sells its ‘receivables’ to a third party, called the factor.  Accounts receivable are a legally enforceable claim for payment to a business by its customer/ clients for goods supplied and/or services rendered in execution of the customer’s order. It involves the ‘factor’ buying outstanding invoices/claims/receivables from the factoring client (usually a company/enterprise) on an ongoing basis.

 

A pre-defined percentage is kept with the ‘factor’, as security deposit. i.e. invoices to a third party, called a factor, at a discount. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights associated with the receivables. The Factor checks the ongoing creditworthiness of the customer and takes under an agreed limit, the full risk of default, before signing the contract.

 

In factoring a company sells its receivables from deliveries of goods and services to its customers continuously to a factoring institution. Hence the company maintains immediate liquidity directly from his debts. With this liquidity obtained by factoring company may also procure-use income in purchasing because of different discounts and special rates. By way of factoring the company outsources its claims and management provides administrative relief. The sale of receivables reduces the balance and leads to better balance sheet ratios.