## Factoring
Factoring is a method where a firm sells its trade debts at a discount to a financial institution (the factor).
### Parties involved
- Client — the firm selling goods/services.
- Factor — the financial institution that buys the debts.
- Debtor — the customer who owes the money.
### Process
The factor buys the client's trade debts (accounts receivable) with or without recourse to the client. The factor also controls the credit extended to customers and manages the sales ledger.
> In simple terms: a factor is an agent who collects the client's dues from its customers for a fee.
### Factoring vs. Bills Discounting
| Aspect | Factoring | Bills Discounting |
|---|---|---|
| Definition | Firm sells trade debts at a discount to a factor, who collects dues for a fee | Supplier draws a bill of exchange; buyer agrees to pay after a set period |
| Parties | Client, Factor, Debtor | Drawer, Drawee, Payee |
| Nature | Management of book debts (focus on accounts receivable) | A borrowing method from commercial banks |
| Legislation | No specific Act for factoring | Negotiable Instruments Act applies |