Factoring Features

Factoring refers to an arrangement between the company and bank or financial intermediary where the bank/financial intermediary agrees to buy the book debts of the company for cash and then it is the bank which collects the money from the debtors and not the company. Given below are the various factoring features –

  1. There are three parties to factoring one is the company which initiates the process by selling the receivables, second party is the debtor and the third party is the factor which is usually bank or financial institution.
  2. The bank which has undertaken the factoring would not pay full amount of the debts rather it will pay only part amount which may be between 50 to 80 percent and rest of payment is made after the collection of money from the debtors.
  3. In factoring factor assumes only collection and there is no transfer of risk, in simple words if a debtor defaults then that loss will not be of factor rather it is the company which has to bear that loss.
  4. It is ideal for those companies which have huge debts in the books, and they are facing a cash crunch and hence by doing factoring they can meet the cash needs of the firm without taking borrowing and using its current asset that is debtors or bills receivable.
  5. There are many types of factoring like Recourse, non recourse, invoice and maturity factoring. If one wants to see these in detail one can read it this post.
  6. The factor charges fees for providing this service and this fee vary depending on the type of factoring, market conditions, quality of debt and so on.

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