IRJC International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 10, October 2012, ISSN 2277 3622 www.indianresearchjournals.com 210 THE CONCEPTUAL FRAMEWORK OF FACTORING ON SMALL AND MEDIUM ENTERPRISES C. SREEKANTH SARMA* *Assistant Professor, Pulla Reddy Institute of Computer Science, Hyderabad, AP, India. ABSTRACT Factoring is a financial tool, which allows you to immediately get money against your credit sales instead of waiting for it to mature. It is a process followed down from hundreds of years ago and now modified to suit various types of industries. This paper explains the conceptual framework of factoring, basics of factoring, Advantages & Disadvantages of factoring, mechanism of factoring and the cause and effect of factoring on Small and Medium Enterprises. KEYWORDS: Factoring, SME, mechanics of factoring. __________________________________________________________________________ INTRODUCTION WHAT IS FACTORING AND HOW IT BENEFITS BUSINESSES? Factoring is a financial tool, which allows you to immediately get money against your credit sales instead of waiting for it to mature. It is a process followed down from hundreds of years ago and now modified to suit various types of industries. Basically, factoring means selling your credit invoices to a third party, called a factoring company and getting immediate payment against that invoice. The factoring company pays you the invoice amount in 2 installments. The first installment is about 60 to 90 percent of the invoice value and is posted electronically to your bank account with one or two days, and the second installment, minus the factoring company's fee is paid to you when your customer pays the invoice amount. This fee is normally 1.5 to 5 percent of the invoice value and normally depends on factors such as your customers' credit rating with the factoring company, the number of credit days as mentioned on the invoice and the total value of business you give to the factoring company. In addition, factoring companies can also take care of your payment collection from your customers. Factoring therefore is a boon for your business, if you have mostly credit sales to a wide range of customers. It not only improves your cash flow dramatically, enabling you to use that money for staff salaries, payments to your suppliers or even to buy in bulk quantities, but also frees up your collection staff which you can re-direct to some other department. It also frees you from the