Factoring is a financial transaction in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.

Factoring

• Usually the period for factoring is 90 to 150 days. Some factoring companies allow even more than 150 days.

• Factoring is considered to be a costly source of finance compared to other sources of short term borrowings.

• Factoring receivables is an ideal financial solution for new and emerging firms without strong financials.

• Bad debts will not be considered for factoring.

• Credit rating is not mandatory.

NATURE OF FACTORING

• Disclosed and Undisclosed• Recourse and Non recourse• Domestic Factoring• Overseas (Export) Factoring• Revocable and Irrevocable Export Factoring• With/Without Notice Factoring

DIFFERENT TYPES OF FACTORING

• Bill discounting is always of recourse type while factoring can be either with or without recourse.• Factoring is an off balance sheet entry in the sense that both amount of receivables and bank credit are not shown in the balance sheet which is not the case with the bill discounting.• Discounted bills may be re-discounted several times before they mature for payment which is not the case with factoring.

Differences between Factoring and Bill Discounting