Factoring:-
Factoring is one type of financial service in which the business enterprise sells its trade receivables to another party at a discount to meet its working capital requirements.
Parties involved in Factoring:-
- The Seller [Client] who sells the goods on credit and raise invoice.
- The another party i.e. outside agency called factor.
- The buyer who buys the goods.
Note:- Client, customers and factor.
Important Points:-
- Seller sells the book debts to outside agency to meet its working capital requirement.
- The factor pays the amount after deducting some amount [called commission] to seller.
- The factor receives the full bills’ amount from customer.
In India, factoring service are provided by the following bank subsidiaries:-
- Canbank Factors Ltd.
- SBI Global Factors Ltd.
Sequence of activities in factoring:-
- Client [seller] sells the goods to customers on the basis of order.
- Client deliver the goods to customer with invoice.
- Client assigns the invoice to factor for payment of invoice at discount.
- The factor makes payment after deducting discount [commission] to client.
- The factor recovers the invoice amount from buyer after expiration of credit period and buyer makes payment to factor.