the conceptual framework of factoring on small and medium enterprises

7/17/2019 The Conceptual Framework of Factoring on Small and Medium Enterprises

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International Journal of Marketing, Financial Services & Management ResearchVol.1 Issue 10, cto!er "01", ISS# ""$$ %""

THE CONCEPTUAL FRAMEWORK OF FACTORING ON SMALL AND

MEDIUM ENTERPRISES

C. SREEKANTH SARMA*

*Assistant Professor,Pulla Reddy Institute of Computer Science,

Hyderabad, AP, India.

ABSTRACT

Factoring is a financial tool, wic allows you to immediately get money against your credit sales

instead of waiting for it to mature. It is a process followed down from undreds of years ago andnow modified to suit !arious types of industries. "is paper e#plains te conceptual framewor$

of factoring, basics of factoring, Ad!antages % &isad!antages of factoring, mecanism offactoring and te cause and effect of factoring on Small and 'edium (nterprises.

KEYWORDS: Factoring, S'(, mecanics of factoring.

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INTRODUCTION

WHAT IS FACTORING AND HOW IT BENEFITS BUSINESSES?

Factoring is a financial tool, wic allows you to immediately get money against your credit salesinstead of waiting for it to mature. It is a process followed down from undreds of years ago andnow modified to suit !arious types of industries.

asically, factoring means selling your credit in!oices to a tird party, called a factoringcompany and getting immediate payment against tat in!oice. "e factoring company pays you

te in!oice amount in + installments. "e first installment is about - to - percent of te in!oice!alue and is posted electronically to your ban$ account wit one or two days, and te second

installment, minus te factoring company/s fee is paid to you wen your customer pays te

in!oice amount.

"is fee is normally 0.1 to 1 percent of te in!oice !alue and normally depends on factors suc asyour customers/ credit rating wit te factoring company, te number of credit days as mentioned

on te in!oice and te total !alue of business you gi!e to te factoring company. In addition,factoring companies can also ta$e care of your payment collection from your customers.

Factoring terefore is a boon for your business, if you a!e mostly credit sales to a wide range ofcustomers. It not only impro!es your cas flow dramatically, enabling you to use tat money forstaff salaries, payments to your suppliers or e!en to buy in bul$ 2uantities, but also frees up yourcollection staff wic you can re3direct to some oter department. It also frees you from te


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assles of payment collection and worrying about customers not paying on time. "e factoringcompany will gi!e you regular updated statements of payments collected by tem and tepending recei!ables statement.

Factoring is directly lin$ed to your sales and ence is muc better tan trying to a!ail a ban$ loan,

wic migt in!ol!e submission of many documents and collateral or guarantees and you willstill a!e to pay interest on tat loan. "roug factoring, it is now possible to go in for a big ordergi!en by your customer, wic pre!iously would a!e loc$ed your money. 4ou can also ma$e

bul$ purcases wit te money recei!ed enabling you to get e#tra discount, wic can be used to

increase your sales and profit margins. So it is a win3win situation for you.

Howe!er, you sould note tat factoring is suitable only if you a!e a minimum of 01 percent of

gross margin on your sales and tat te credit period offered to your customers is not !ery ig.

Calculate your profit margin after deducting te factoring company/s carges so tat you candecide weter it is !iable financially to employ teir ser!ices. Also, since your customers will

a!e to be informed about your arrangement wit te factoring company, some of tem migt not

be comfortable of ma$ing payments to tird parties.

"ere are !arious types of factoring facilities a!ailable suc as in!oice factoring, purcase orderfactoring, etc. wic a!e different percentage of carges. 4ou can find different factoring

companies ad!ertising on te internet. 4ou can e!en ire te ser!ices of a factoring bro$er to find

you te rigt factoring company to matc your needs. It normally ta$es a wee$ or two to set it up.So, go in for factoring and watc your bottom line and sales impro!e. It/s easier tan it sounds.

"o lend to businesses, particularly S'(s and tose witout a long financial trac$ record to

demonstrate teir stability. 'any are loo$ing for alternati!e ways to ensure tere is always

enoug money in te ban$ to pay suppliers and staff, buy new stoc$ and meet all te oter

o!ereads wic running a business entails.

Small business factoring is one of te most popular metods of acie!ing tis and one wic isgaining more and more popularity wit businesses in !irtually e!ery sector.

HOW SMALL BUSINESS FACTORING WORKS

In its simplest terms, small business factoring in!ol!es a company selling its outstanding

in!oices to a factor wo will gi!e te company up to 15 of teir !alue straigt away. It ten

becomes te factor6s responsibility to pursue full payment of eac in!oice from te company6s

customers. As eac one is settled, te factor pays te outstanding balance minus te fee and

interest carges it ma$es for eac in!oice. 7en loo$ing for potential factors to get a 2uotation it

can be a good idea to go !ia an independent bro$er li$e "ouc Financial wo can gi!e you a rangeof options free of carge.


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THE HISTORY OF FACTORING

Factoring is one of te oldest forms of commercial finance. Some scolars trace its origins to teRoman (mpire 8Rutberg 09:; 3and some e!en furter bac$ to te Hammurabi, four tousand

years ago 8Papadimitriou, Pillips, and 7ray 09:. "e term factor comes from te


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THE ADVANTAGES OF FACTORING

"ere are a wide range of reasons wy small business factoring can be a sound financial

decision.

IMPROVED CASH FLOW. ecause payment will be made by te factor witin

+9

ours of recei!ing an in!oice it will gi!e almost immediate access to cas wic migt

oterwise ta$e up to - days to recei!e.

SAVES TIME: ecause responsibility for billing and casing payment is ta$en by

te

factor it frees time wic te small business can spend more profitably ser!icinge#isting clients or pursuing new ones.

CREATES GREATER FINANCIAL STABILITY:


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THE DISADVANTAGES OF FACTORING


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4. Factoring as a Financing ption@ (!idence from te B, (F'A +--- Atens, aled

Soufani, Concordia Bni!ersity, Kuedec ; &epartment of Finance.

5. Community3ased Factoring Companies and Small usiness

the conceptual framework of factoring on small and medium enterprises

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