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Factoring (Financial Management)

>> August 19, 2011

In financial management is new topic which has included in working capital chapter. Factoring is that transaction in which company sells its receivable debt amount to third party. For example, I want to get $ 15000 from different debtors, if I sell it to XYZ bank on $ 14000. This transaction will be factoring. This is also our asset. In simple word, factoring is technique of conversion of debtor in liquid asset.

Factoring Vs Short Term Loan

Factoring is not short term loan. Factoring is the contract of sale of total or some amount of receivables at discount but short term loan may be the amount which is received on specific rate of interest. Sometime, total receivables may collateral security of secured short term loan.

Importance of Factoring Deal

1. Factoring is important source of cash inflow. It can be used for fulfilling the need of cash for paying our liabilities on the time. If we see that debtor conversion period is too long but creditor conversion period is too short, we deal of factoring for paying our creditors

2. We have to maintain our cash balance for paying expenses. We estimate our cash balance with following formula and if there is any shortage of our physical cash balance, we may contract of factoring. 

How does International Factoring Work?

If you want to sell your total receivables in international market, you have to divide your debtor into two part. One is  good and other is doubtful. You can deal of credit default swap with doubtful and  bad debtors and for good debtor, you can deal of factoring on discount.

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Nelson Oyler September 3, 2014 at 2:43 AM  

Your summaries are always top-notch. Thanks for keeping us apprised. I’m reading every word here.

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