Page 177 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management Tanima Dutta, Lovely Professional University

Notes Unit 11: Factoring

CONTENTS
Objectives
Introduction

11.1 Meaning of Factoring
11.2 Features of Factoring
11.3 Role of Factoring in Receivables Management

11.4 Summary
11.5 Keywords
11.6 Review Questions
11.7 Further Readings

Objectives

After studying this unit, you will be able to:

Know the meaning of factoring
Discuss the features of factoring

Explain the role of factoring in receivables management
Introduction

Receivables constitute a significant portion of current assets of firm. But, for investment in
receivables, a firm has to incur certain costs such as costs of financing receivables and costs of
collection from receivables. Further, there is a risk of bad debts also. It is, therefore, very
essential to have a proper control and management of receivables. In fact, maintaining of
receivables poses two types of problems;
(i) the problem of raising funds to finance the receivables, and
(ii) the problems relating to collection, delays and defaults of the receivables.
A small firm may handle the problem of receivables management of its own, but it may not be
possible for a large firm to do so efficiently as it may be exposed to the risk of more and more
bad debts. In such a case, a firm may avail the services of specialised institutions engaged in
receivables management, called factoring firms.
At the instance of RBI a Committee headed by Shri C. S. Kalyan Sundaram went into the aspects
of factoring services in India in 1988, which formed the basis for introduction of factoring
services in India. SBI established, in 1991, a subsidiary-SBI Factors Limited with an authorized
capital of ` 25 crore to undertake factoring services covering the western zone
11.1 Meaning of Factoring

Factoring may broadly be defined as the relationship, created an agreement, between the seller
of goods/services and a financial institution called the factor, whereby the later purchases the
receivables of the former and also controls and administers the receivables of the former.

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