Factoring is becoming popular all over the world on account of various services offered by the institutions engaged in it. Factors render services ranging from bill discounting facilities offered by the commercial banks to total take over of administration of credit sales including maintenance of sales ledger, collection of accounts receivables, credit control, protection from bad debts, provision of finance and rendering of advisory services to their clients. Thus factoring is a tool of receivables management employed to release the funds tied up in credit extended to customers and to solve problems relating to collection, delays and defaults of the receivables.
1. The factors provides specialised services with regard to sales ledger administration and credit control and relieves the client from the botheration of debt collection. He can concentrate on the other major areas of his business and improve his efficiency.
2. The advance payments made by the factor to the client in respect of the bills purchased increase his liquid resources. He is able to meet his liabilities as and when they arise thus improving his credit standing position before suppliers, lenders and bankers. The factor’s assumption of credit risk relieves him from the tension of bad debt losses. The client can take steps to reduce his reserve for bad debts.
3. It provides flexibility to the company to decide about extending better terms to their customers.
4. Where credit information is also provided by the factor, it helps the company to avoid bad debts.
It ensures better management of receivables as factor firm is specialised agency for the same. The factor carries out assessment of the client with regard to his financial, operational and managerial capabilities whether his debts are collectable and viability of his operations. He also assesses the debtor regarding the nature of business, vulnerability of his operations; and assesses the debtor regarding the nature of business, vulnerability to seasonality, history of operations, the term of sales, the track record and bank report available on the past history.