Advantages of Factoring

Advantages of Factoring

Factoring is an arrangement, where a factor (third party) is responsible to manage the debtor account and collection from the sales. Factor provides immediate payment to business against credit sales for determined fees.

1.    Liquidity

Factoring arrangement improves liquidity within organization. This improved liquidity can be used advantageously by the organization in many ways, which has been explained below;

2.    Produce & Sell

Factoring arrangement provides an opportunity to produce and sell more units due to improve liquidity (depending on the demand).

3.    Boosted Sales

Sales can be boosted by lowering profit, selling price and making credit sales, because there is no problem of collection of debt. Such boost of sales will generate more funds for the organization.

4.    Stock Level

High stock level can be achieved with the help of factoring arrangement. There is no liquidity problem; therefore fund can be invested in stock.

5.    Cost Saving

Factoring arrangement saves many cost for the organization i.e. accounting staff cost to maintain sales ledger, debt collection cost etc.

6.    Profitability

Factoring arrangement can improve profitability of the organization, because with the help of factoring arrangement sales can be boosted. Even a small margin with high volume of sales can improve profitability hugely.

7.    Short investment opportunity

Additional cash can be invested in short term investment. These investments will increase the wealth of the organization.

8.    Management Effort & Time

Factoring arrangement saves the management of effort & time. This time and effort can be used by the management in other important matters.

9.    Risk of Bad Debt

No risk of bad debt in factoring arrangement. All risk of nonpayment is transferred to the factor.