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Factoring

The business activity in which a company takes over the responsibility for the collection of the debts of another. It is a service primarily intended to meet the needs of small- and medium-sized firms. It developed comparatively slowly in the U.K. compared with the U.S. in spite of the fact that the banks took important interest in the leading factoring companies. Typically, the client debitsall his sales to the factor and can draw cash up to about 80 per cent of their value, thus increasing his cash flow considerably. The factor takes over the entire responsibility for retreiving the debts due form the client’s customers and protect the client from bad debts. The factor, however, hassome control over sales either by imposing a maximum credit limit which he is willing to meet or by vetting specific prospective clients. Through international factoring companies the factor can offer a service to exports by protecting his customers from bad debts overseas and bygiving, for instance, expert advice on foreign exchange transactions.

Reference: The Penguin Business Dictionary, 3rd edt.