Factoring is a financial transaction where a business sells its accounts receivables at a discount to a factoring company. Factoring creates a positive cash flow for the companies. Owing to the numerous advantages that this concept offers, banks and other factoring companies must gear themselves in this direction. However, a strong legal framework is required for this service to grow in India. This article describes this new concept to the readers.

Factoring is a continuous ar- rangement between a fi- nancial institution and a business concern selling goods and services to trade customers. In factoring, the factor undertakes collection of the client's debts and finance to client is provided on the basis of his accounts receivable.

Lack of working capital can prevent a company from making new sales, forcing it into a liquidity crunch. An adequate cash flow for working capital is one of the essentials for smooth running of any business. Factoring helps clients to improve their cash flows by providing ready cash for their credit sales, which will improve the liquidity. Every booming business needs capital. In a maturing market like India, factoring is seen as a distinct service vis-à-vis banking products for receivables.

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