 It is a continous arrangement between the

financial institution / ( namely the factor ) &

the company ( namely the client ) which sells
goods & services to the customers on credit
 As per this arrangement , factor purchases
the clients’s trade debts either with or
without recourse to the client
 And exercises control over the credit
extended to the customers
 Theclient is immediately paid 80 % of the
trade debts taken over & when the trade
customers repay their dues , factor will make
remaining 20% payment
 Assignment of debt in favour of factor
 Selling limits for the client
 Conditions within which the factor will have
recourse to the client incase of non payment
by the trade customers
 Details regarding the payment to the factor
for his services , say for instance as a
certain percentage of turnover
 Purchase & collection of debts the factor
purchases the entire trade debts & thus
becomes the holder for value & not an agent
, once the debts are purchased it becomes
automatically his responsibility for collection
of those debts
 Sales ledger management the factor has to
credit the customer’s account whenever a
payment is received . He has to take up the
work of monthly sales analysis & credit
analysis
 Credit investigation & undertaking of credit
risk
 Provision of finance the factor provides 80
% of the credit sales as prepayment to the
client . This payment is generally made
without recourse to the client , that is in the
event of non payment the factor has to bear
the loss of payment
 Rendering consultancy services
 Full service factoring or without recourse
factoring factor provides finance , administers
sales ledger , collects debts at his risk & renders
consultancy services . If debtors fails to repay
the debts , the entire responsibility falls on the
shoulder of the factor since he assumes the
credit risk
 With recourse factoring factor does not
assumes the credit risk , if the debtors do not
pay their dues in time , the debts are
automatically assigned back to the client .
 The client has to take up the work of collection
of overdue accounts by himself but if the client
wants factor to go for collection he has to pay
refactoring charges
 Invoice factoring factor simply provides
finances against the invoices without
undertaking any other functions . All works
connected with sales administration ,
collection of dues have to be done by client
himself
 The debtors are not at all notified about the
financing arrangement . This type of
factoring is confidential in nature hence it is
known as confidential invoice discounting
 Agency factoring under this the factor & the
client share the work between themselves as
follows
 The client has to look after the sales ledger
management & collection work
 The factor has to provide the finance &
assumes the credit risk
 Limited factoring the factor does not take
up all the invoices of a client , he discounts
only selected invoices on the merit basis &
convert credit bills into cash in respect of
those bills only
 Seller based factoring the seller instead of
discounting his bills , sells all his accounts
receivables to the factor after invoicing the
customers . The seller’s job is over as soon as
he prepares the invoices
 Thereafter all the documents connected with
sale are handed over to the factor who takes
over the remaining functions
 This facility is extended to the reputed
credit worthy sellers & hence it is also called
as selected seller based factoring
 Financial service
 Collection service
 Credit risk service
 Provision of expertise sales ledger
management
 Consultancy services
 Economy in servicing
 Off balance sheet financing
 When factor purchases book debts of the
client these debts no longer exist on the
current asset side of the balance sheet
 It leads to reduction in debts & less
collection problems
 The clients can utilize money so received to
reduce his current liabilities it means an
improved current ratio
Liabilities Amount Assets Amount

Current Current assets

liabilities 500000 Stock 800000
Bank loan Receivable 600000
against stock 400000 Others 200000
Bank loan -
against bills
200000
Others
500000
Net working
capital
 Services of the factor in the domestic busines
s are simply extended to the international
business
 Factoring is done purely on the basis of the
invoice prepared by the exporter so it is
purely an “invoice based export finance
technique “
 The exporter who is taking the place of the
client
 The importer who is taking the role of
customer
 Export factor
 Import factor