Roll No:-1016

Class:- M.com Part-1

Subject:- Fundamentals of financial services
 Contents
1. Meaning of factoring agreement

2. Functions of factoring:-

a. Administration of sales ledger

b. Provision of collection facility

c. Financing trade debts

d. Credit investigation and undertaking of

credit risk
e. Rendering consultancy services
Meaning:-
A Company and a Factor enter into an agreement
in which the Factor purchases a Company’s
account receivables and then pays the company
the purchase price of the accounts.
Functions of Factoring
 1. Administration of sales ledger
The factor maintains the client’s sales ledger.

 On transacting a sales deal, an invoice is sent by the client to the

customer and a copy of the same is sent to the ledger.

 The factor also gives periodic reports to the client on the current
status of his receivables, receipts of payments from the customers
and other useful information.

 In addition, the factor also maintains a cutomer-wise record of

payments spread over a period of time so that any change in the
payment pattern can be easily identified.
 2. Provision of collection facility

 The factor undertakes to collect the receivables on

behalf of the client relieving him of the problems
involved in collection and enables him to concentrate on
other important functional areas of the business.

 Collection of receivables can be considered as the

most important function of a factor.
 3. Financing trade debts
 The unique feature of factoring is that a factor purchases the book
debts of his client at a price and the debts are assigned in favour of
the factor who is usually willing to grant advances to the extent of 80-
85% of the assigned debts.

 The balance 15-20% is retained as a factor reserve.

 Where the debts are factored with recourse, the finance provided
would become refundable by the client in case of non-payment by the
buyer.

 However, where the debts are factored without recourse, the

factor’s obligation to the seller becomes absolute on the due date of
the invoice whether or not the buyer makes the payment.
4. Credit investigation and undertaking of credit risk
 The factor has to monitor the financial position of the customer
carefully, since, he assumes the risk of default in payment by
customers due to their financial inability to pay.

 For this purpose the factor also undertakes credit investigation

work.
 5. Rendering consultancy services

 Apart from the above, the factor also provides

management services to the client.

 He informs the client about the additional business

opportunities available, the changing business and
financial profiles of the customers, the likelihood of
coming recession, etc.
 References
1. Website
https://www.bg.law/what-is-factoring-agreement-and-10-
important-factoring-provisions
2. Books
 Financial Services 9th Edition by M.Y.Khan
 Financial Markets And Services by E.Gordon and K.Natarajan
Thank You