Factoring | CS/CA Inter, CA Final SFM (Old Syllabus)

#Factoring, #ReceivablesManagemnt, #WorkingCapitalManagement, #CAInterFM, #CSExecutiveFM

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Factoring is an arrangement were a firm appoints an agent known as “Factor”, who would collect the outstanding balances from the debtors of the firm and the firm will pay commission or fees for such services.

The factor may also advance money to the firm at a predefined interest rate and therefore the factor will earn interest income on the amount advance.

Generally the factor will maintain a margin or a reserve while advancing the money to the firm.

For example, if debtors balance is ` 10,00,000, the factor is retaining a margin of 20%, then the factor will provide an advance of ` 8,00,000 to the firm.


Types of Factoring:
1. Non- recourse Factoring
2. Recourse Factoring

Under a Non- recourse Factoring, if there is any loss arising from bad debts, such loss will be borne by the factor.

Under a Recourse Factoring, the bad debts losses are borne by the firm itself.

Generally the commission rate is higher in a non-recourse arrangement.

Important Notes:
1. If the question uses the language like, “the factor agrees to buy the receivables of the firm” or “the firm sells its receivables to the factor” then it is implied that all risks and rewards associated with receivables have been transferred to the factor.
This implies that the factoring is on non-recourse basis.

2. Generally in a factoring arrangement, the factor might recover fees and interest upfront, i.e., at the beginning of the arrangement. In such case, the factor will adjust the amount advanced which will be reduced by such upfront fees and interest.

3. Sometimes there may be an offer of advance by bank and the firm has to decide, whether to accept the arrangement offered by factor or the advance offered by bank.