Advantages of Factoring

The advantages of Factoring are: 

1. Immediate Cash Flow: This sort of financing shortens the cash collection period. It facilitates quick cash realisation by selling receivables to a factor. The availability of liquid cash can often be the factor for grabbing and giving up an opportunity. The cash boost given by factoring is readily available for capital expenditures, completing a new order, or meeting an unexpected condition.

2. Focus on Business Operations and Growth: By selling off invoices, business owners may relieve themselves of the burden of collecting payments from customers. Receivables department resources can be focused on business operations, financial planning, and future growth.

3. Bad Debt Evasion: There are two sorts of factoring: with recourse and without recourse. In the case of bad debts, the factor bears the loss without recourse factoring. As a result, once the seller sells its receivables, it has no responsibility to the factor.

4. Quick Finance Arrangement: Factors provide funds more quickly than banks. Compared to other financial institutions, factoring provides a faster application, less documentation, and faster settlement of funds.

5. No Requirement for Security: The advances are made based on the strength of the receivables and their creditworthiness. Factors, unlike cash credit and overdraft, do not require any collateral security to be pledged or hypothecated. New enterprises and startups with significant receivables can readily qualify for advances. Factoring, unlike typical bank loans, does not necessitate the use of your house or other property as security.

6. Customer Analysis: Factors give significant guidance and insights to the seller on the credit quality of the party from whom receivables are due. It helps in the negotiation of better terms between the parties in futures contracts.

7. Time Savings: Factoring can save the firm time and effort that would otherwise be spent collecting from consumers. That energy can be applied to other business-building tasks such as sales, marketing, and customer development.

8. Cheap Source of Finance: It is a cheap source of finance than any other means such as banking.

9. No charge on Assets: It does not create any charge on the assets.

A financial service under which a ‘factor’ provides various services, like discounting of bills and providing information about the credit worthiness of prospective clients, etc., is known as Factoring.