What is Factoring?

• Factoring is a financial transaction where a

business sells its accounts receivable (invoices)
to a third-party company (factor) at a discount.

• The factor pays the business a percentage of the

invoice amount upfront, typically 70% to 90%.

• The factor then assumes the responsibility of

collecting payment from the business's
customers.
PROCESS INVOLVED IN FACTORING

Client concludes a credit sale with a customer.

Client sells the customer's account to the Factor and notifies the
customer.

Factor makes part payment (advance) against account purchased,

after adjusting for commission and interest on the advance.

Factor maintains the customer's account and follows up for

payment.

Customer remits the amount due to the Factor.

Factor makes the final payment to the Client when the account is
collected or on the guaranteed payment date.
 METHODOLOGY OF FACTORING
Step 1: Identify the Need Step 2: Select a Factor

Before diving into factoring, assess your business needs. Research and compare different factoring companies.
Common reasons to consider factoring include: Consider factors like:
• Improving cash flow • Experience in your industry
• Reducing the risk of bad debts • Reputation and customer reviews
• Freeing up time and resources for core business • Types of factoring offered
activities • Advance rates and fees
• Managing slow-paying customers • Minimum invoice size requirements

Step 3: Invoice Factoring Agreement Step 4: The Factoring Process

Once you've chosen a factor, negotiate the terms of the
factoring agreement. This agreement should outline:
• The type of factoring used (recourse, non-recourse, or
maturity)
• The advance rate you will receive on your invoices
• The fees associated with the factoring service
• The responsibilities of both you and the factor
Once the agreement is signed, the factoring process is:
• You submit your invoices to the factor electronically or
by mail and he verifies the invoices and approves them
for factoring.
• The factor advances you a percentage of the invoice
value (typically 70-85%).
• The factor takes over the responsibility of collecting
payment from your customer.
 TYPES OF FACTORING

On the basis On the basis On the basis On the basis

of Default Risk of disclosure of trade of payment

Recourse Disclosed Domestic Advance

Factoring Factoring Factoring Factoring

Non-
Undisclosed Export Maturity
Recourse
Factoring Factoring Factoring
Factoring
 PROS OF FACTORING
Improved cash flow

Reduced risk

Easier access to capital

Focus on core business

Expertise in collections

Competitive pricing
 CONS OF FACTORING
Exhausting Collateral Security.

Continuity of Service.

Lack of a Personal Touch in Buyer/Seller Relationships.

Dependency.

Not a long term solution.

High Cost.