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Factoring an essential service

Written By Vignesh on Friday, July 10, 2009 | 1:14 PM

I never knew there is a service named factoring till last month. I am sure even most of the business people don’t know such a service exists in India. When I came to know about this service I wanted to know more about it and made some researches to know what it is, and at last I found out that factoring is a service, which Indian business people are unaware of, by which their profit margin declined to a negligible extent.

First of all let me explain you what is factoring. A agreement is entered between the producer of the goods and the factor, the agreement is that, the producer will produce goods and sell them to the seller and in return the factor will give 80% of the invoice value to the producer and will give the rest 20% of the invoice value after the supplier remits his 100% payment to the factor.

Explaining you with an example, assume A as a Producer, B Factor, and C Buyer. A produces goods and sends it to C, the goods worth 100,000. A and B will enter into an agreement. Agreement is that as soon as C sends the acceptance of the invoice and goods A will remit it to the B (I. e the factor), the factor in return will give A Rs. 80000. The balance 20000 will be given by the factor only after he receives 100,000 from C. Factor will charge a small amount as commission from the producer for his service rendered.

Advantages of Factoring
• No needs to borrow money from banks are any other financial institutions for the purpose of working capital.
• As there is no need of any loans the credit worthiness of the producer will increase and goodwill will have indirect effect of increase.
• The factor in a few days will tend to know the clients of the producer and so he may warn the producer about the credit worthiness of that client.
• A factor being professional he know how to get the money from the buyer in case if he does not return it in time
• As we assign the bills receivable department to the factor, our work burden is reduced.

Having all such advantages one may think why factoring has not gained popularity in India! Even I had the same doubt, but I dint stay with that doubt, my research continued to know the reasons behind why factoring has not gained a point in India.
Indian law does not support factoring service. In simple terms, there is no separate law to govern factoring services. In case of any problems legal action is nearly impossible. Those companies which take up factoring service are considered as non banking finance company (NBFC), so if there is a loss they cannot recover their money through Debt Recovery Tribunal OR Securitization Act, which again make people think twice to start factoring services in India and business persons to go for this service.

When Indian government can make laws for all useless shits, why can’t they make a law governing factoring service? Why is this area totally neglected by government of India? As in all cases a bill was drafted nearly 6 years ago to protect this frame work but it’s yet to pass the parliament.

Why can’t government such good bills soon and make them as laws? By making this factoring service as a legal one, which is don’t by giving factoring a legal frame work for its support surely the economy of the nation is going to improve. Ask me how?

If the business persons can get their working capital back in no time then they need not get loans and pay interest, means they will have money in hand. If this is the case the business in India will surely improve at a faster rate, because as the business men have money they may tend to invest and double it where by employment will be created and there will be a circulation of money.
Thus I prefer factoring as an essential service and this is the area to be enlightened by the Indian government. Let’s try to take the necessary steps possible.


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Vignesh, the founder of VikiInfos, is a Commerce Graduate and Pursuing his Chartered Accountant Profession, now in the Intermediate level. Blogging is his hobby and likes to share things. He plans to Update this blog with latest happenings and things that he gets to know at times and worthy information.a friendly user blog can be followed by any person. Join us free and subscribe.
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