## Factoring: Outsourcing Receivables Management
### Meaning
Factoring is a specialised service related to receivable management. It involves:
- Credit investigation
- Sales ledger management
- Purchase and collection of debts
- Credit protection
- Provision of finance against receivables
### How It Works
Accounts receivable are generally sold to a financial institution called a factor, who:
- Pays the seller (client) upfront (usually 80–90%)
- Charges a commission
- Bears the credit risk of the receivables purchased
- Takes responsibility for monitoring, follow-up, collection, and risk management of debts
### Advantages of Factoring
1. Immediate cash conversion — the firm can convert receivables into cash without bothering about repayment.
2. Predictable cash inflows — factoring ensures a definite pattern of cash inflows.
3. No credit department needed — continuous factoring virtually eliminates the need for an in-house credit department.
4. Flexible financing — financing scales automatically with sales; expand or contract proportionally.
5. No compensating balances — unlike unsecured loans, no minimum balances are required.
6. Reduces credit & collection costs — frees the firm from much of these costs and from part of cash management.
### Why It's Popular
Receivables financing through factoring is gaining popularity as a useful short-term financing source because of its inherent flexibility.