Discuss the types of services offered by ‘Factoring’? Discuss its two merits and one limitation.
Discuss the types of services offered by ‘Factoring’? Discuss its two merits and one limitation.
The various services offered under factoring are as follows :
(a) Discounting of bills and collection of the clients debt—Under this, the receivables on the account of sale of goods or services are sold to the factor at a certain discount. The factor becomes responsible for the debt collection from the buyer.
(b) Providing information about the creditworthiness of prospective client— Factors hold large amounts of information about the trading histories of the firms. These factors provide financial consultancy services.
Two merits and one limitation of factoring is discussed below :
MERITS
(a) Cheaper—Obtaining funds through factoring is cheaper than financing through other means such as bank credit and so on.
(b) Flexible Source of financing—Factoring as a source of funds is flexible and ensures a definite pattern of cash inflows from credit sales, thus reducing financial risk.
LIMITATION
(a) Not suitable for small-scale organisations—This source is expensive as the advance finance provided by the factor firm is generally at a higher interest cost than the usual rate of interest.
The various services offered under factoring are as follows :
(a) Discounting of bills and collection of the clients debt—Under this, the receivables on the account of sale of goods or services are sold to the factor at a certain discount. The factor becomes responsible for the debt collection from the buyer.
(b) Providing information about the creditworthiness of prospective client— Factors hold large amounts of information about the trading histories of the firms. These factors provide financial consultancy services.
Two merits and one limitation of factoring is discussed below :
MERITS
(a) Cheaper—Obtaining funds through factoring is cheaper than financing through other means such as bank credit and so on.
(b) Flexible Source of financing—Factoring as a source of funds is flexible and ensures a definite pattern of cash inflows from credit sales, thus reducing financial risk.
LIMITATION
(a) Not suitable for small-scale organisations—This source is expensive as the advance finance provided by the factor firm is generally at a higher interest cost than the usual rate of interest.
