Question

What is factoring? Why do companies factor?

Answer 1

The amounts due to a company from customers, on account of credit sale generally remains outstanding
during the period of credit allowed i.e. till the dues are collected from the debtors.The book debts may be assigned to a bank and cash realised in advance from the bank.Thus, the responsibility of collecting the debtors’ balance is taken over by the bank on payment of specified charges by the company. This method of raising short-term capital is known as factoring. The bank charges payable for the purposeis treated as the cost of raising funds.

Companies use factoring to improve cash inflow and reduce the risk of bad debts.