What is Factoring?

Factoring : Factoring is a continuing legal relationship between a financial institution
and business unit selling goods or providing services to trade customers on open
account basis whereby the factor purchases the client’s book debts (account
receivables) either with or without recourse to the client and in relation thereto,
controls the credit extended to customers and administers the sales ledgers. The
financial institution is the factor and the business unit is called the client. The seller of
goods is always referred to as a client and the buyers as customers.
A factor finances the client not by way of providing an advance but by literally
purchasing the book debts by making a payment. It becomes the owner of debts and
thereby assumes the onus of collecting the debts. If it is effective in its collections it
preferably assumes control over the credit management of the supplier. The factor
relieves the client of the onus of making the collections by itself assuming the
responsibility. Thus, the client gets the benefit of elimination or reduction in cost of
collections in terms of savings of manpower as well as time and energy. The factor
does not adopt stringent and coercive measures. It is equipped with trained and
exclusive manpower. It has infrastructural aids such as access to communication
network and trained staff.