Receivable management is a focused activity, and requires a lot of time and hard work from financial executives of the company. Realization of receivables creates a trouble, mainly for small companies. Banks have the strategy of funding receivables.
On the other hand, this help is obtainable for a limited time and the sellers of products and services have to tolerate the danger of non-payment by debtors. Work relating to receivable management may be assigned to a specialist of an organization for efficient and effective realization of receivables. This type of activity is called factoring. Factoring is a well-known method of administrating, funding and realizing receivables. In India some banks and financial institutes and their subsidiaries use it to make available factoring services to their clients.
A commercial bank may provide finance by discounting the bills or invoices of its customers. Thus a firm gets immediate payment for sales made on credit. A factor is a financial institution which offers services relating to management and financing of debts arising out of credit sales.
Factor render various services including maintenance of sales ledger, collection of accounts receivables, credit control and protection from bad debts, provision of finance and rendering of advisory services to their clients. Factoring may be on a recourse basis, where the risk of bad debts is borne by the client or on a non-recourse basis, where the risk of credit is borne by the factor.
Major disadvantages of factoring are:
- The high cost of factoring as compared to other sources of short term finance
- The perception of financial weakness about the firm availing factoring services
Adverse impact of tough stance taken by factor, against a defaulting buyer, upon the borrower resulting into reduces future sales
