neromoving.blogg.se - Invoice factoring definition

Substitute for market credit: Factoring has an important role in working capital finance.Factor makes balance 20% on realisation to client.įollowing are some of the advantages of factoring services:.Factor make pre-payment up to 80 % to client.Client sends goods and invoice to customer.Firstly, the customer places an order with the Client.Mechanics of Factoring shown in figure is explained below: Assignee (the factoring company) or factor is the service provider who purchases the invoice and gives advance payment to business firm.įactor is thus an intermediary between the seller and buyer.They owe the money for the value of goods and services bought from the seller. They promise to pay the balance within the agreed payment terms. Debtors or customers of the client are the recipient of the invoice for the goods or services rendered.

Seller of the product or service provider who originates the invoice is called Client and generally is a business firm.

In a factoring arrangement, there are three parties directly involved namely the one who sells the invoice (client), the debtor (customer of the seller), and the factor (financial organization). Factoring is a method of off balance sheet financing.But the factoring companies usually carry out credit risk analysis before entering into the agreement. Credit rating is not mandatory for factoring.Hence these companies can leverage on the financial strength of their customers. This is because creditworthiness is evaluated based on the financial strength of the customer (debtor). Factoring receivables is an ideal financial solution for new and emerging firms without strong financials.

Factoring is considered to be a less costly source of finance compared to other sources of short term borrowings.

Some factoring companies allow even more than 150 days.

Usually the period for factoring is 90 to 150 days.

Factor provides finance for the supplier, including loans and advance payments.

In other words, factoring may also be defined as a continuous relationship between financial institution (the factor) and a business concern (the client) selling goods and/or providing service to a trade customer on an open account basis, whereby the factor purchases the client’s book debts (account receivables) with or without recourse to the client.