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Chapter: Business Science - Merchant Banking and Financial Services - Other Fund Based Financial Services

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Features of Factoring

The characteristics of Factoring are as follows:

Features of Factoring

 

The characteristics of Factoring are as follows:

 

1.  The Nature The nature of the Factoring contract is similar to that of a bailment contract. Factoring is a specialized activity whereby a firm converts its receivables into cash by selling them to a factoring organization. The Factor assumes the risk associated with the collection of receivables, and in the event of non-payment by the customers/debtors, bears the risk of a bad debt loss.

 

3. The Form Factoring takes the form of a typical Invoice Factoring‗since it covers only those  receivables which are not supported by negotiable instruments, such as bills of exchange, etc.  This is because, the firm resorts to the practice of bill discounting with its banks, in the event of receivables being backed by bills. Factoring of receivables helps the client do away with the credit department, and the debtors of the firm become the debtors of the Factor.

 

2. The Assignment Under factoring, there is an assignment of debt in favor of the Factor. This is the basic requirement for the working of a factoring service.

 

3. Fiduciary Position The position of the Factor is fiduciary in nature, since it arises from the relationship with the client firm. The factor is mainly responsible for fulfilling the terms of the contract between the parties.

 

4. Professionalism Factoring firms are professionally competent, with skilled persons to handle credit sales realizations for different clients in different trades, for better credit management.

5.     Credit Realizations Factors assist in realization of credit sales. They help in avoiding the risk of bad debt loss, which might arise otherwise.

 

6.     Less Dependence Factors help in reducing the dependence on bank finance towards working capital. This greatly relieves the firm of the burden of finding financial facility.

 

7.     Recourse Factoring: Factoring may be non-recourse, in which case the Factor will have no recourse to the supplier on non-payment from the customer. Factoring may also be with recourse, in which case the Factor will have recourse to the seller in the event of non-payment by the buyers.

 

8.     Compensation A Factor works in return for a service charge calculated on the turnover. Actor pays the net amount after deducting the necessary chares, some of which may be special terms to handle the accounts of certain customers.

 

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