Factoring Importance, Utility and Significance
Factoring Importance can be summarized in the points below:
Immediate increase in cash flow – The client does not wait for the credit time period as he receives money immediately from the factor and bears a nominal fee for the waiting period.
Less Costly – It reduces the financial burden on the client. It enables the client to invest somewhere else, save cost of manpower, maintenance of accounts, collection of money etc.
Professional Collection – A Factoring company has an efficient system for collection of receivables. Therefore they are experts in collection of debt. Each invoice is followed with a payment and the buyer and client are notified periodically with relevant information and due dates which leads to better productivity,
Invoice Processing – It relieves the factor from the task of mailing, posting, deposit of cheque, preparing reports etc.
Source of Finance – It accelerates the turnover of receivables, results in higher sales and return on investment, allows the client to expand his business etc.
Utility and Significance of Factoring
Credit Risk – The factor company takes the risk of default i.e. risk related to non-payment. The credit limit is fixed and defined therefore it relieves the client from burden of collection amount.
Maintenance of Sales Ledger – Ledger account of all debtors is maintained by the factor. An open account method is adopted and the factor prepares periodic reports for the client.
Collection of receivables – It is the responsibility of factor. The factor has trained manpower and well equipped infrastructure for this purpose. Timely follow up is done and appropriate strategies are formed by the factor that save time and efforts, man power wastage, chances of bad debts etc.
Financing of trade debt – The factor provides up to 80% of the cost of goods sold in advance which reduces the financial burden on the client. Sometimes the factor provides full credit protection against bad debts.
Providing Advisory and Consultancy Services – The factor also provides the following Advisory and Consultancy Services to client:
- Guide the client about market trends of his/her products
- Assessing credit worthiness of the customer
- Systematic analysis and credit recovery
- Issuing letter of credit
- Auditing and dealing with sales return
Credit Analysis of the customer – The factor scrutinizes all information regarding outstanding balance, credit time period due, information from credit rating agencies, trade references, banking reports etc. which helps in better credit control.