How does Factoring help?
Factoring works best in cases where the seller doesn’t have enough balance sheet standing or collateral support to raise standalone working capital finance but has good quality receivables. Factoring typically works well for the small and medium (SME) segment and companies in their growth phase where risk appetite remains constrained. A seller will, in such cases, be able to convert such receivables to cash (for a fee) thus aiding his working capital cycle. The clear benefit here is that the cash raised is directly proportionate to the underlying sales and is hence largely scalable unlike traditional bank finance. While various structures are in vogue, a factor can also provide a company with specialized add-ons like credit protection against bad debts, outsourcing of their sales book and funds collections etc.
