FACTORING: A CREDIT MANAGEMENT TOOL

Abstract

Credit management is a special activity which involves a lot of time, effort and cost to a business concern. Factoring is a mechanism of managing, financing and collection of receivables by a specialist organisation on behalf of the business enterprises, the specialist organisation may be commercial banks, industrial banks, financial institutions, cooperative banks, mutual trusts etc. Factoring is a specialised activity whereby a firm converts its receivables into cash by selling them to a factoring organisation. In factoring services, there is a scale of goods/services between the client and the customer. Factoring is a unique financial innovation. Factoring may be defined as ‘a contract between the supplier of goods/services and the factor’. Factoring relates to accounts receivables management. Collection of receivables and protection against default is managed by the factor. The factor performs basic functions such as administration of seller’s sales ledger, credit control, collection of dues etc. The costs of factoring are interest on advance executed by the factor and communication or fee for his services. Benefits arising from factoring are both qualitative and quantitative. All the basic services provided by a factor can be obtained individually from other sources. Thus, as a financial system combining all the related services, factoring offers a distinct solution to the problems posed by working capital tied up in trade debts.