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Analyze the importance of factoring in the financial field, showing both immediate and far-ranging consequences.
Analyze the advantages and disadvantages of factoring.
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Factoring Accounts Receivables
Factoring is defined as 'a continuing legal relationship between a financial institution (the factor) and a business concern (the client), selling goods or providing services to trade customers (the customers) on open account basis whereby the Factor purchases the client's book debts (accounts receivables) either with or without recourse to the client and in relation thereto controls the credit extended to customers and administers the sales ledgers'.
Characterstics of Factoring
Usually the period for factoring is 90 to 150 days. Some factoring companies allow even more than 150 days.
Factoring is considered to be a costly source of finance compared to other sources of short term borrowings.
Factoring receivables is an ideal financial solution for new and emerging firms without strong financials. This is because credit worthiness is evaluated based on the financial strength of the customer (debtor). Hence these companies can leverage on the financial strength of their customers.
Bad debts will not be considered for factoring.
This discusses the advantages and disadvantages of factoring