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Factoring – Financing Receivables

Introduction

Companies sell goods on credit (e.g., 90 days credit). Their money gets stuck in "Debtors" (Receivables). Factoring unlocks this money immediately.

1. The Process

  1. Sale: Client (Seller) sells goods to Customer (Buyer) on credit. Invoice value ₹100.
  2. Assignment: Client assigns the invoice to the Factor (Bank/NBFC).
  3. Advance: Factor pays 80% (₹80) immediately to Client.
  4. Collection: On due date, Factor collects ₹100 from Customer.
  5. Settlement: Factor pays balance 20% (minus fees) to Client.
graph TD A[Seller] -- 1. Sells Goods --> B[Buyer] A -- 2. Assigns Invoice --> C[Factor] C -- 3. Pays 80% Advance --> A B -- 4. Pays Full Amount --> C C -- "5. Pays Balance (20% - Fees)" --> A

Factoring Mechanism

2. Types of Factoring

A. Recourse Factoring (Common in India)

  • If Customer defaults, Client must refund the money to Factor.
  • Risk stays with Client.

B. Non-Recourse Factoring

  • If Customer defaults, Factor bears the loss.
  • Risk stays with Factor. (Fees are higher here).

3. Benefits

  • Liquidity: Immediate cash. No waiting for 3 months.
  • Sales Ledger Management: Factor also maintains the accounts and chases customers for payment.

Summary

  • Factor: The Financier.
  • Recourse: Client bears bad debt risk.
  • Non-Recourse: Factor bears bad debt risk.
  • Product: Financing + Collection Service.

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