Definition and Mechanism
Factoring can broadly be defined as an agreement in which receivable arising out of which the title of the goods services represented by the said receivables passes on to the factor. Henceforth. the factor becomes responsible for all credit control, sales accounting and debt collection from the buyer(s). In a full service factoring concept (without recourse facility), if any of the debtors fails to pay the dues as a result of his financial inability insolvency bankruptcy, the factor has to absorb the losses.
Credit sales generate the factoring business in the ordinary course of business dealings. Realization of credit sales is the main function of factoring services. Once a sale transaction is completed, the factor steps in to realise the sales. Thus, the factor works between the seller and the buyer and sometimes with the seller’s banks together.