The debt factoring is technique where collection for credit sales is the responsibility of independent third party against an agreed fees. The credit sales and collection record is maintained by the that party. The party is responsible to collect debt and pay it back to the company.
The factoring company immediately pay some portion to the company like seventy to eighty percent and the remaining portion is paid when the debt is fully recovered and the fee is is deducted from the remaining portion. The following are advantages of debt factoring.
Cash are available :- The cash available as soon as the sales invoices are issued to debt factoring company.
Cost of Sales ledger are saved :- The sales ledger are maintained by the debt factoring company. therefore the cost is reduced .
Cost of collection is saved :- The other important cost is saved of the cost of chasing the customer. some time in case of small amount of credit the cost of collection exceed the actually amount collected from some customer.
Disadvantages of Factoring
- Factoring company charges high fee sometime more than 5% of invoice values
- Aggressively chase customer may loss customer
- Customer relationship and goodwill at stake
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