Modern day economies are passing through a phase of conversion, and the service sector is grabbing the share of agriculture and industry in the Gross Domestic Product (GDP) of the world. The financial services are predominant, and growing by leaps and bounds in the service sector. Factoring is a novel innovation in services for catering to the requirements of liquidity in the business, thus providing a new avenue of finance. As an innovative financial system, it is of immense benefit to industries. To pursue growth objectives, manufacturers and the suppliers conduct business transactions, partly on the basis of cash and partly on credit, which creates plenty of book debts, the delayed payments of which may hamper future production and sales. These people can take the help of factoring services to ensure smooth running of their businesses.

Business transactions, both at the retail and the wholesale levels, take place partly on the basis of cash and partly on credit. The buyers normally do not have to make down payments on the delivery of goods and services. The sellers allow the buyers sometime to make payments after the goods are received. The seller extends the trade credit to the buyer during this interval of time—between the receipt of goods and payment of cash. This period is also known as the Net Credit Period. The dues which arise during this process of Credit Sales are known as `Trade Receivables', from the point of view of sellers and `Trade Payables', from the point of view of buyers. The sellers may extend credit without demanding any legal evidence to the liability of the buyers or they may require promissory notes or trade acceptances from buyers. This practice of extending credit enables the sellers to increase sales. Therefore, the effort of a seller is to always collect receivables as quickly as possible. In other words, receivables management occupies a significant part of time, efforts, and cost of working capital management on the part of sellers. A good receivables management helps in reducing the collection period to the minimum without adversely affecting the sales. The sellers may make their own internal arrangement to collect receivables or they may hand over this job to a specialized collection agency. Such an agency is known as a factor in the business world.

A factor is a financial institution or a bank which manages the collection of accounts receivable on behalf of the companies and bears the credit risk associated with those accounts. In general, factoring means selling the receivables by the firm to a factor, with or without recourse. By factoring, the company relieves itself of the organization, procedures and internal expenses of collecting its receivables.

Under full factoring arrangement, factor renders services of collection of receivables and maintains sales ledgers, credit control and credit protection. On the basis of creditworthiness of the firm, a monetary limit is fixed up to which trade credit provided by the client will be taken over by the factor without recourse to the client. The liability of the factor is limited only to the defaults arising out of the customer's financial inability to pay. If the payment is withheld for reasons of dispute regarding inherent defect in goods, quality, quantity, counter claim, etc., legal recourse will be available to the factor against the client.

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