'Factoring is a financial option for the management of receivables.' In the light of this statement, explain the meaning and advantages of factoring.

Meaning of Factoring: 'Factoring is a financial option for the management of receivables.' In simple word it is the conversion of credit sales into cash. In factoring, a financial institution (factor) buys the accounts receivable of a company (Client) and generally pays up to 80% of the amount immediately on agreement. Factoring company pays the remaining amount (Balance 20%- Finance cost-operating cost) 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. Advantages of factoring for a seller: Seller gets funds immediately after the sale is effected and on presentation of accepted sales invoices and Promissory notes. Major part of paper work and correspondence is taken care of by the factor. Follow-up, for recovery of funds, is done mainly by the factor. Interest rates are not as high as normal discounting. Increased cash flow to meet payroll. Immediate funding arrangements. No additional debt is incurred on balance sheet. Other assets are not encumbered. Approval is not based on seller's credit rating.