Is Factoring is Fund Based Financial Service

 What is factoring, factoring is a fund based financial service predicated on the receivables of a firm. Factoring may be defined as a continuing legal relationship between the financial institution and a business concern selling goods or providing services to trade customers on open account basis whereby the factor purchases the clients book debits either with or without recourse to the client and in relation thereto control the credit extended to the customer and administer the sale ledger 

It is apparent from this statement that credit factoring is concerned with debts from the traders as opposed to customers. Thus in factoring between the two parties to sale another party enters to facilitate financial transactions. This party is a factor. The term factor has its own origin in the Latin word ‘facere’ meaning to make or to do. He acts as an agent between a supplier and the customer for performing a variety of financing services including credit management. The factor purchases the book debts of suppliers consequently tied up funds in book debt are released to increase the liquidity of the supplier. Technically the book debts are assigned to the factor and it is he who collects them on maturity dates. Factoring is termed as fund-based financial service since normally factor makes a part payment maybe 90 percent immediately after the debts are purchased. For this service, he charges interest which is above the market prevailing rate. By virtue of this facility dependence on banks for working capital is reduced especially in cases of expanding sales. Besides the collection of the debts purchased and arranging the payment against such purchased debts factor provides few other services which are:

• Administration of seller’s sales ledger

• Covering the credit risk involved 

• Advisory services he gets service charges over and  above the discount or rebate for the debts collected by him

The term financial institution may call as The Factor the business concern is client. The trade customers are the consumers the clients book debts means accounts receivables.