Friday, November 7, 2008


Factoring is a services that does not have a concise difinition.A factor us a doer or transactor of business for another but a factoring organization specializes in trade bedts & managers the debts owed to a client ( a business coustomer) on the client's behalf.
The main aspects of factoring are
  • Administration for the clients invoicing,sales,accounting & debt collection service;
  • Credit protection for the clients debts,where are by the factor takes over the risk of loss from bad debts & so "insures" the client against serch losses.This servise is also referred to us debt" underwriting"or the "purchase of a clients debts" the factor usually purchase those debts "whithout recourse" to the clients,which means that if the clients debtors do not pay what they owe,the factor will not us for his money back from client.
  • Making payments to the client in advance of collecting the debts. This is sometimes refferred to us "factor finance" because the factor is providing cash to the client against outstanding debts.
The Advantages of Factoring.
The benifits of factoring for a business customer include the follwing,
  • The buniness can pay its suppliers promptly, & so be able to take advantage of any early payments discounts that are available.
  • Optimum stock levels be maintained, because the business will have enough cash to pay for the stocks is needs.
  • Growth can be financial through sales rather than by injecting fresh external capital.
  • The business gets finance linked to its volume of sales.In contracts overdraft limits tend to be determine by historical balance sheets.
  • The managers of the business do not have to spend their time on the problems of slow paying debtors.
  • The business does not incur the cost of running its own sales ledger department.
Factoring and Bank Finance.
If a company arranges with a factor for advances to be made against its debts, the debts will become the security for the advance. If the some company already has a bank overdraft facility, the bank may be relying on the debts as form of security (perhaps not legal security,in the form of a ploating charge over stocks & debtors, but as an element in the decision about how much overdraft to allow the company) the bank may therefore wish to reduce the companies overdraft limit.
Invoice Discounting.
Invoice discounting is related to factoring & many factors will provied an invoice discounting service.It is the purchase of a selections of invoices, at a discount.The invoice discount does not take over the administration of the clients sales ledger, & the arrangement is purely for the advance of cash. A client should only want to have some invoices discounted when he has a temporary cash shortage & so invoice discounting tends to consist of one-off deals.
Confidential invoice discounting is an arrangement whereby a debt is confidencially assigned to the factor, & the clients customer will only because oware of the arrangement if he does not pay his debt to the client.

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