What is Factoring?

• Factoring is a financial transaction where a business

sells its accounts receivable (invoices) to a third-
party company (factor) at a discount.

• The factor pays the business a percentage of the

invoice amount upfront, typically 70% to 90%.

• The factor then assumes the responsibility of

collecting payment from the business's customers.
PROCESS INVOLVED IN
FACTORING
Client concludes a credit sale with a customer.

Client sells the customer's account to the Factor and notifies the
customer.

Factor makes part payment (advance) against account purchased, after

adjusting for commission and interest on the advance.

Factor maintains the customer's account and follows up for payment.

Customer remits the amount due to the Factor.

Factor makes the final payment to the Client when the account is
collected or on the guaranteed payment date.
 METHODOLOGY OF FACTORING
Step 1: Identify the Need Step 2: Select a Factor

Before diving into factoring, assess your business needs. Research and compare different factoring companies. Consider
Common reasons to consider factoring include: factors like:
• Improving cash flow • Experience in your industry
• Reducing the risk of bad debts • Reputation and customer reviews
• Freeing up time and resources for core business activities • Types of factoring offered
• Managing slow-paying customers • Advance rates and fees
• Minimum invoice size requirements

Step 3: Invoice Factoring Agreement Step 4: The Factoring Process

Once you've chosen a factor, negotiate the terms of the
factoring agreement. This agreement should outline:
• The type of factoring used (recourse, non-recourse, or
maturity)
• The advance rate you will receive on your invoices
• The fees associated with the factoring service
• The responsibilities of both you and the factor
Once the agreement is signed, the factoring process is:
• You submit your invoices to the factor electronically or by
mail and he verifies the invoices and approves them for
factoring.
• The factor advances you a percentage of the invoice value
(typically 70-85%).
• The factor takes over the responsibility of collecting
payment from your customer.
 TYPES OF FACTORING
On the basis
On the basis On the basis On the basis
of Default
of disclosure of trade of payment
Risk
Recourse Disclosed Domestic Advance
Factoring Factoring Factoring Factoring

Non-
Undisclosed Export Maturity
Recourse
Factoring Factoring Factoring
Factoring
 PROS OF FACTORING
Improved cash flow

Reduced risk

Easier access to capital

Focus on core business

Expertise in collections

Competitive pricing
 CONS OF FACTORING
Exhausting Collateral Security.

Continuity of Service.

Lack of a Personal Touch in Buyer/Seller Relationships.

Dependency.

Not a long term solution.

High Cost.