Factoring is a financial transaction whereby a business entity sells its account receivable (i.e. invoices) to a third party (called a factor) at a discount to invoice amount.
It could also be a long term arrangement, subject to periodical review, under which a financial institution assumes the credit and collection functions for its client, purchases receivables as and when they arise (with or without recourse to the credit losses, i.e. client's/debtor's inability to pay), maintains the sales ledger, attends to other bookkeeping responsibilities relating to such accounts and performs other associated functions.
Factoring Modus Operandi Simplified
* Firm gets an order for purchase of goods/services on credit through its client.
* Firm executes the order and sends goods/services to its client (debtor) and firm may inform its client or direct that invoice amount is assigned to and must be paid to a Factor.
* Firm sends invoice to a Factor, along with mutually agreed documents, including despatch proof.
* Factor releases payment to the Firm immediately, which can be up to 80% - 90% of the invoice amount as per arrangement.
* Factor follows up directly with the debtor when payment of invoice becomes due.
* Debtor pays invoice value to the Factor on the due date ( i.e. book debts are collected by Factor).
* Factor liquidates outstanding in its book and releases the balance amount of the invoice to the Firm.
It would be pertinent to mention RBI allows Banks to to set up subsidiaries or invest in Factoring Companies jointly with other Banks. However, it was felt absence of Factoring Law acts as a impediment in the growth of Factoring business in India. Other aspects hindering growth of Factoring business are levy of heavy stamp duty over assigned deed, and ambiguity in respect of legal rights of Factor in respect of receivables.
Keep watching this space for more interesting updates!
Comments