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(^398) Financial Management
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 buyerís market, few sellers can afford to
irritate customers.
Need for Factoring in India
At present the commercial banks in India provide working capital finance through
purchasing/discounting of receivables allowing over-draft/cash credit ï against
hypothecation of outstanding book debts, allowing over-draft/cash credit against bills
sent for collection through the bank and allowing overdraft/cash credit against amounts
due from Government/Semi-government agencies in respect of supplies made to them.
While the banks do finance the receivables, such finance is with recourse to the supplier
who bears the risk of default by the debtor. The bankís credit support to the supplier is,
thus, for a limited or pre≠determined period and on the expiry of the said period, if the
dues are not realised, it generally calls upon the supplier/borrower to repay the finance.
Thus, the bank finance is always with recourse to the seller, i.e., if the buyer fails to
make payment for any reason, the bank recovers the amount involved from its customer,
viz., the seller.