Economic Role of Factoring in Financing Small Business.

An survey found that bank owned and independent factoring firms revealed that factoring companies combines credit insurance, book keeping of the client, and the supply of finance(which is the main function). 

Different services are offered to the particular requirements of each client, but clients are not obliged to take all the services. Factoring companies usually work with multiple firms within a specified industry which will help this in gaining the knowledge/ experience from dealing with different clients and the customers make themselves ready to accept the offer services that go beyond the simple purchasing of accounts receivable.

A market, an industry, customers, sales, costs and credit are important parameters potentially to enhance the economic efficiency and performance of the small enterprise. As factoring is considered to be a financing option that supports the working capital of firms, then it is possible to establish a positive relationship between turnover and working capital requirements incorporating the economic role of factoring and invoice financing.

There is few argument saying that factoring service is more suitable for new businesses for growing in the terms of their turnover where the main need is working capital support.

Nowadays factoring is more widely accepted technique for financing the working capital of small

Enterprises. Therefore, the growth in the potential role that the factoring industry can play in

Cementing its contribution in the financial services market to small businesses becomes increasingly important.

The combination of a rapidly growing factoring industry with increasingly risk-assessment information will encourage greater competition, increasing market segmentation and possibly higher levels of supplier concentration, which will all be conducive to making a positive contribution to the economic decision-making process of financing Micro, Small and Medium Enterprises(MSME).

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Types of Factoring service companies and reasons?

Two types of factoring business can be classified, namely bank-owned and independent factoring firms. There is a clear distinction from the results between factoring firms owned by banks and smaller independent factors. Bank owned factors has more diversified portfolio in terms of a firms of different sizes, while the smaller ones were largely positioned at the smaller end of the market.

The main reason for this relationship is the degree of competition between large and small factors. The larger factors enjoy economies of scale, have access to more funds, and can acquire more information through the parent bank at relatively little cost. The smaller factors have limited resources and, consequently, may acquire the more marginal businesses.

There is a correlation observed in recent studies that between the size of the factor and the size of the client, ie that the smaller the factoring company the more willing it is to take clients with small turnover.

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How Factoring Business select their clients?

The important basis or parameter used by a factoring business is turnover/sales as that will reflects the clients business volume, and also helps in figuring out the future growth of the firm and present stage. Factoring works in different ways

Further factoring business based on client's turnover is taken two important reasons.

1)    Client sales turnover is considered to be an important criteria for taking an decision to supply the factoring service, which means overall firms profit is considered.

2)    For market segmentation client turnover is taken as basis. Because this helps in assessing the potential ability of the small firm in generating sales and factor provided will be able to help in sustaining the financial service is carried by factoring companies.

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What is Factoring and How it works?

Meaning / Definition of Factoring: 
Factoring is a basically an agreement between two firms in carrying an financial transaction whereby a business job sells its Accounts Receivable(invoices) to a Third party company (called a factor) at an discount rate/interest for such service provided.

Factoring Process and Operation.

The Process of Factoring works like this: 
Steps how Factoring works
When a customer firm places order with the supplier firm supplies for credit the goods and issues Invoices(AR), later to get an immediate funds for funding its current obligation or other requirements like working capital it request financing, where the Factoring Firm comes into play its role by financing against the cash against receivable/invoices by usually charging an fees in the way of discount. interest, where later part the client will make the payment directly to the Factoring Firm.


In this way all different types of factoring business firm, select the clients and makes and provide economic value by financing businesses.

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