Jahan University

Faculty of Management Sciences

Department of BBA

Subject: Financial Management

Lecture# 12
Lecturer: Mr. Hayatullah Momand (MS- Finance)

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 Objectives
At the end of this lecture students will be able to know:
1. Concept of Factoring

2. Factoring commission

3. Types of factoring

4. Nature of obligation of factor

5. Need for factor services

6. Parties to factoring contract

7. Factoring operating cycle

8. Advantages of factoring

9. Disadvantages of factoring

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 Outline
I. Factoring

II. Factoring commission

III. Types of factoring

IV. Nature of obligation of factor

V. Need for factor services

VI. Parties to factoring contract

VII. Factoring operating cycle

VIII.Advantages of factoring

IX. Disadvantages of factoring

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 Factoring
 Meaning: factoring is a financial service, which involves managing, financing and collecting receivables. It is a
method of converting non-productive assets (receivables) into productive assets (cash).

 Factoring may be defined as a contract between the supplier of goods/services and the factor under which the factor
agrees to perform at least two of the following functions:
1. To finance the assigned book debts (receivables)
2. To maintain accounts relating to receivables
3. To collect book debts
4. To provide protection against default in payment by debtors
5. To provide credit administration services to the clients to decide whether or not and how much credit be
extended to the customers.

 Factoring Commission: The commission charged by the factor for providing services is known as factoring
commission. It is usually expressed as a percentage of face value of receivables factored.

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 Types of factoring
1. Non-recourse factoring: under non-recourse factoring, factor assumes the risk of bad debts and
charges higher commission for and advances cash up to 80/90 % of book debts immediately.

2. Recourse factoring: under recourse factoring, factor does not assume the risk of bad debts and
charges lower commission for and advance up to 70/80% of book debt.

3. Maturity factoring: under maturity factoring, factor makes the payment on maturity.

4. Non-notification factoring: under non-notification, the notice of assignment of receivables is not

given to the debtors. But the factor performs all his functions without a disclosure to the customer that
he own the book debts.

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 Need for Factoring Services
 Need for factor services is felt by traders to concentrate on sales and realization of credit sales be
left in specialized hands to minimize the risk of bad debts arising on account of non-realization
of credit sales. If sales are realized within reasonable time, the traders need not depend much for
bank finance towards working capital.

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Parties to factoring contract

Buyer of
goods

Factor who
Seller of
acts as
goods
agent

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Factoring operating cycle

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 Advantages and Disadvantages
Advantages of factoring
1. Prompt payments and credits.
2. Reduction of administrative cost and burden.
3. Improvement in liquidity.
4. Provides insurance against bad debt.
5. Current assets are efficiently managed thus
reducing working capital requirements.
Disadvantages of factoring
1. Image of the client may suffer as engaging of a
factoring agency is not considered a good sign of
efficient management.
2. Factoring may not be of much use where
companies have nation-wide network branches.
3. If the client has cheaper means of finance and
credit (where goods are sold against advance
payment) factoring my not be useful.
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 Conclusion
Factoring

Factoring commission

Types of factoring

Nature of obligation of factor

Need for factor services

Parties to factoring contract

Factoring operating cycle

Advantages of factoring

Disadvantages of factoring

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 References
1. Hand book of Financial Management

2. Fundamental of financial management by Rustagi

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