Potentiality of Factoring as a Source of Short-term Finance

Factoring is becoming popular all over the world in view of the variety of services
rendered by factors to business organisations. Its importance has tended to increase in
recent years owing to growing industrialisation and consequential growth in the volume
of industrial production and sales. A factor, by dint of the function of buying debts
without recourse, not only provides financial support to his client firm and meets a
portion of its working capital, but also relieves the latter of the botheration of collecting
the receivables from the customers and suffering losses due to bad debts. The firm
may also avoid the necessity of operating a credit department for analysis and collection.
In addition to rendering financial assistance, a factor assists his client in credit planning
and control. On the basis of the information and assessment of creditworthiness of
potential customers, a factor is able to advise his client whether to extend credit to a
particular buyer or not, and if it is to be extended, the amount and period therefor.
A factor may also generate other useful information for his clients. The factor, on
account of a large volume of transactions handled by him, is in a position to computerise
the operations and hence is equipped to perform book-keeping services for more
efficiently and expeditiously than an average business concern.
It is important to note that firms that are small or have seasonal sales patterns may
realise substantial savings in credit and collections because the factor serving a large
number of accounts can realise economies of scale and also can achieve better
diversification with respect to default risk.
However, the most critical fall-out of factoring is institutionalisation and perpetuation of
credit and perhaps even delayed payments. Further, any tough stance taken by the
factor against a defaulting buyer may have its direct impact on such borrower cutting
short his orders on the particular seller. In a buyer’s market, few sellers can afford to
irritate customers.

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