Page 183 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes 5. The company does not have to fall out with any customers over unpaid bills! As far as the
company is concerned, they have been paid. (It is worth noting that a future invoice may
not be considered for factoring if a debtor defaults).
6. Having access to the factoring company for credit checking of customers enables the
supplying company to make good credit decisions on more customers.

7. Factoring does not create any balance sheet liabilities so it does not offend investors and
other business stakeholders.
8. It is an inexpensive way of providing working capital to the business without high interest
rates being charged.
9. Many businesses who are unable to raise finance in the normal manner, because of poor
credit history, can still raise money through factoring schemes as the credit rating that
matters is that of their customers.
10. Factoring is a method of financing available to organizations that are considered as high
risk.

Self Assessment

State whether the following statements are true or false:
6. The factor purchases the client’s debtors and in relation thereto, controls the credit extended
to the customer and administers the sales ledger.
7. Factoring does not create any balance sheet liabilities so it does not offend investors and
other business stakeholders.

8. Factoring is a method of financing available to organizations that are considered as low
risk.

11.4 Summary

Factoring can broadly be defined as an arrangement in which receivables arising out of
sale of goods/services are sold to the “factor” as a result of which the title to the goods/
services represented by the said receivables passes on to the factor.
Factor selects the accounts of the receivables of his client and set up a credit limit, for each
account of receivables depending on safety, financial stability and credit worthiness.

Factoring is the purchase of accounts receivables at a discount in order that the supplier/
creditor can receive their cash straight away. A business will consider factoring receivables
when facing a period of cash flow problems.

11.5 Keywords

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.

UNIDROIT: International Institute for the Unification of Private Law

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