Guide to Factoring in Finance

Factoring relates to a financial product with which banks, savings banks and other commercial organizations offer to business clients. Apart from the financial payment, the factoring service provider takes over the credit risk including the exchange rate risk as regards to instances where the invoice is based on foreign currency.

Additionally, factoring also renders collection management duties, accepts receipt of credit and offers guidance to the client about the borrowers.

And the bulk of entities utilizing factoring are small to medium enterprises as they aim to meet their capital requirements, particularly in regions where access to bank loans is poor, but this route is most useful to ventures that do business with large companies which come with favorable levels of credit ratings.

Factoring provides a substantial amount in the form of credit which can go up to 80% of the loan balance as a way of encouraging clients to comply with administrative functions efficiently and granting credit control.

Essentially the companies purchasing or engaged in factoring of receivables related to sales of property, service delivery or completion of works derive many advantages from such transactions.

And the advantages include benefits accrued from the accuracy reports delivered, enhancement of customer base and saving time and money.

Factors also boost mobilization of the portfolio of debtors and go on to guarantee recovery of all of them, thus assisting with accounting functions as factoring contracts aptly displays single client account cash settlements.

In practice the rule of the thumb in this domain is that it takes three to tango, with one party responsible for selling the receivable, another being the debtor, and ultimately the factor.

A receivable can be in the form of a financial asset associated with the debtor’s liability to repay funds owed to the seller, the seller is entitled to  selling invoices at a discount to a third party, resulting in the factor cashing in.

These arrangements also allow people to receive advance payments on the receivables, on top of providing protection in inflationary processes by having the money in advance.

The benefits seem endless as the debt of the contracting company is significantly reduced, furthermore, operating costs can be significantly lowered on the basis of the capacity to sell receivable accounts, while firms with international interests can also take full advantage of increases in export related revenue.

And factoring can conveniently be utilized as a fertile source of funds, thus creating a welcome reliable cash flow for a company through commissions on receivables accounts. In this financial arena it is common for the receivables transactions to be regarded as irreversible, therefore any existing liability incurred by one of the parties at the sale stage, will remain as such.