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Facts And Myths About Factoring

Facts And Myths About Factoring:

(1). MYTH: Factoring is nothing but bill discounting or bill finance.

FACT: Factoring and bill discounting are two different products tailored for two different markets. Factoring is meant for “Open account sales” and caters largely to a buyer’s market. Bill discounting is normally prevalent in a seller’s market. Factoring unlike bill discounting offers a continuous relationship.

(2). MYTH: Factoring reduces bankers business.

FACT: Factoring is not merely financing and includes a package of services like collection and follow-up of each invoice, credit insurance. MIS support etc., and improves the health of bank’s clients, improves cash flow through factoring, increases production cycles and need for more working capital. Factoring essentially aims at replacing high cost market credit and not necessarily reduce bank finance.

[Post Image Courtesy of JK1991 at FreeDigitalPhotos.net]

(3). MYTH: Factoring is an high cost borrowing.

FACT: Factoring is Comparable to interest rates of banks. (SSI – 13.50% to 15.75% Non-SSI 13.50% to 17.25%) Will to offer SBI’s PLR selectively)

(4). MYTH: Factoring service charge is high.

FACT: Service Charge is 0.1% to 0.3% only whereas in Bills discounting, the collection charge is 0.5% to 0.6%.

(5). MYTH: Factoring is meant for manufacturing units only

FACT: Factoring is Extended to all sectors namely Manufacturing, Trading and Services.

(6). MYTH: Factoring limits falls within MBBF/ Assessed Bank finance.

FACT: Factoring is to be classified as other Current liability as per RBI guidelines and Factoring replaces market credit and not bank borrowings.

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

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