Provision of Collection Facility
The factor undertakes to coiled 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 is also enables the client to reduce the cost of collection hy way of savings in manpower, time and efforts. The use of trained manpower with sophisticated infrastructural backup enables a factor to systematically follow up and make timely demands on the debtors to make payments. Also, the debtors are more responsible to the demands from a factor being a credit institution.
Collection of receivables can be considered as the most important function of a factor. He is generally not required to consult the client with regard to the collection procedure. But he may consult the client if legal action has to be initialed in case of non payment and so on.
Credit Control and Credit Restriction
Assumption of credit risk is one of the important functions of a factor. This service is provided where debts are factored without recourse. The factor in consultation with the client fixes credit limits for approved customers. Within these limits the factor undertakes to purchase all trade debts of the customer without recourse. In other words, the factor assumes the risk of default in payment by the customer. Arising from this function of the factor, there are two important incidental benefits accruing to the client firstly, factoring relieve the client of the collection secondly, with access to extensive information available on the financial standing and credit rating of individual customers and their track record of payments, the factor is able to advise the client on the creditworthiness of potential customers leading to better credit control.
These services are a spin off of the close relationship between a factor and a client. By virtue of their specialised knowledge and experience in finance and credit dealings and access to extensive credit information, factors cari provide a variety of incidental advisory services to their clients:
• Customer’s perception of the client’s products, changes in the marketing strategies, emerging trends and so on.
• Audit of the procedures followed for invoicing, delivery and dealing with sales returns:
• Introduction to the credit department of a bank subsidiaries of banks engaged in leasing, hire purchase and merchant banking.