A financial arrangement where a business sells its entire accounts receivable to a third party (factor) at a discount to obtain immediate cash.
Factoring is a form of receivables financing where a factor (usually a bank or NBFC) purchases a company's trade receivables at 80–90% of face value and manages the collection process. Unlike bill discounting which handles individual bills, factoring covers the entire receivables ledger or selected customer accounts. The factor provides: immediate cash (advance), credit protection (in non-recourse factoring), sales ledger management, and collection services. In India, factoring is regulated by the Factoring Regulation Act, 2011. Types include domestic factoring, export factoring, recourse factoring (seller bears default risk), non-recourse factoring (factor bears risk), and reverse factoring (buyer-initiated).
A company factors ₹50,00,000 in receivables. Factor advances 85% = ₹42,50,000 immediately. Service fee: 1.5% = ₹75,000. Interest on advance for 60 days at 15%: ₹1,04,795. Total cost: ₹1,79,795. After collection, factor pays balance: ₹50,00,000 − ₹42,50,000 − ₹1,79,795 = ₹5,70,205.
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In factoring, the factor takes over the entire collection process and the customer knows about the arrangement (notification). In invoice discounting, the business retains control of collections and customers are usually unaware (confidential). Factoring includes credit management services; invoice discounting is purely financing.
It works best for B2B businesses with creditworthy customers, regular receivables, and growth capital needs. It's less suitable for B2C (many small invoices), businesses with disputed invoices, or companies with concentrated customer risk (one customer = most revenue).
Money owed to a business by its customers for goods or services delivered but not yet paid for.
A short-term financing method where a business sells its trade receivable (bill of exchange) to a bank at a discount to receive immediate cash before the bill's due date.
A form of short-term borrowing where a business uses its unpaid invoices as collateral to receive immediate cash from a financier, while retaining control of collections.
The difference between a company's current assets and current liabilities, representing the short-term liquidity available for day-to-day operations.
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