Factoring - Meaning & Process 🧾

Definition: Factoring is a financial service where a firm (Client) sells its Accounts Receivable (Invoices) to a third party (Factor) at a discount. The Factor provides:

1. Immediate Cash (80%).
2. Sales Ledger Administration (Maintenance).
3. Credit Protection (in Non-Recourse).

Parties:

1. Client: The Seller of goods.
2. Customer: The Buyer (Debtor).
3. Factor: The Financial Institution (Bank/NBFC).

Types of Factoring 📋

1. Recourse Factoring (Most Common in India)

• If Customer fails to pay, Factor recovers money from Client.
• Factor acts only as financier and collector. Risk is with Client.

2. Non-Recourse Factoring

• If Customer fails to pay (Bad Debt), Factor bears the loss.
• Factor provides Credit Protection.
• Fees are higher.

The Process 🔄

1. Client sells goods to Customer.
2. Client sends Invoice to Customer and copy to Factor.
3. Factor pays 80% advance to Client.
4. Factor maintains the ledger and follows up with Customer.
5. Customer pays full amount to Factor on due date.
6. Factor pays remaining 20% (minus fees) to Client.

Quiz Time! 🎯

💡 Final Wisdom: "Factoring is outsourcing your collection department. You focus on sales, Factor focuses on collection!" 🤝

Next up: Factoring - Advantages & Disadvantages! ⚖️