Explain the following: (e) Factoring.

Factoring is a financial transaction where an entity sells its receivables to a third party called a 'factor', at discounted prices. Factoring is a financial option for the management of receivables. In simple definition it is the conversion of credit sales into cash. In factoring, a financial institution (factor) buys the accounts receivable of a company (Client) and pays up to 80% (rarely up to 90%) of the amount immediately on formation of agreement. Factoring company pays the remaining amount (i.e Balance 20%) to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client depending upon the type of factoring. The account receivable in factoring can either be for a product or service. For instance, factoring against goods purchased, factoring for construction services (usually for government contracts where the government body is capable of paying back the debt in the stipulated period of factoring. Contractors submit invoices to get cash instantly), factoring against medical insurance etc. The factoring transaction involves three parties: The Seller, who has produced the goods/services and raised the invoice. The Buyer, the consumer of goods/services and the party to pay. The Factor, the financial institution that advances the portion of funds to the seller.