What Services does Factoring Include?

1. Discounting of bills (with or without recourse) and collection of the client’s debts:

Bill discounting (with or without recourse) and debt collection from the customer. The receivables from the sale of products or services are sold to the factor at a particular discount. The factor takes over all credit supervision and debt collection from the buyer and protects the company against any bad debt losses.

Factoring may be done in two ways : recourse and non-recourse :

The customer is not safeguarded against the risk of bad debts under recourse factoring. But non-recourse factoring involves the factor taking on the complete credit risk, which means that the full amount of the invoice is reimbursed to the client if the debt becoming bad.

2. Providing information about the creditworthiness of prospective clients:

Factors retain vast volumes of information on the trading history of businesses, which they use to provide information about the creditworthiness of new clients, among other things. This can be beneficial to individuals that use factoring services and therefore avoid doing business with consumers who have a bad payment history. Factors may also provide appropriate consulting services in areas like finance, marketing, and so forth.

The terms and type of factoring may differ from one financial institution to another. The advance rate might range from 80% to 90% to 95% of the entire invoice amount. After collecting payments from debtors, the factor returns the remaining funds after deducting its charge or commission.

The factor collects fees from customers for services provided. Only in the early 1990s, as a result of RBI initiatives, factoring appeared on the Indian financial scene. State Bank of India, Canara Bank, Punjab National Bank, Allahabad Bank, and SBI Factors and Commercial Services Ltd. are among the organizations that provide these services. Factoring services are furthermore offered by several non-banking finance companies and other organisations.

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.