Functions of a Factor
Depending on the type form of factoring, the main functions of a factor, in generate terms can be classified into five categories:
• Financing facility trade debts;
• Maintenance administration of sales ledger;
• Collection facility of accounts receivable;
• Assumption of credit risk credit control and credit restriction; and
• Provision of advisory services.
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 favour of the factor who is usually willing to grant advances to the extent of, say, 80 per cent of the assigned debts. Where the debts are factored with recourse, the finance provided would become refundable by the client in case of non payment of 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.
Administration of Sales Ledger
The factor maintains the clients sales ledgers. On transacting as all deal, an invoice is sent by the client to the customer and a copy of the same is sent to the factor. The ledger is generally maintained upper the open item method in which each receipt is marched against the specific invoice. The customer’s account clearly reflects the various open invoices outstanding on any given date the factor also gives periodic (fortnightly, weekly depending on the volume of transactions) 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 customer wise record of payments spread over a period of time so that any change in the payment pattern can be easily identified.