FACTORING bharath

FACTORING : MEANING Factoring is a fund-based financial service provided by financial institutions called factors. SBI factors states that factoring is a continuous arrangement between a financial institution and a business firm that sells goods and services whereby the factor purchases the client’s book debts or the accounts receivable. Contd…

It is a receivables management and financing service designed to improve the client’s cash flow and to cover risks associated with credit sales. bharath

FEATURES OF FACTORING Assignment of book debts to the factor. Notification to the customer about factoring arrangement. Cash advance to the client. Credit protection. Legal administration. Collection and follow up.

DIFFERENCE BETWEEN BILL DISCOUNTING AND FACTORING Involves financing only. Bill has to be accepted by the buyer. Banks advance money against bills. Individual transaction-oriented process. With recourse facility. FACTORING Involves total package of service including finance. One-time notification. Purchase book debts by assignment. Lump sum finance against a set of invoices. With or without recourse facility.

Fig. 5.1. MECHANISM OF FACTORING 6. Balance 20% on Realization 3. Pre- Payment up to 80% 2. Assigns Invoice to Factor 5. Payment to Factor 1. Sends Invoices to Customer 4. Statement to Customer C U S T O M E R F A C T O R C L I E N T Fig. 5.1. MECHANISM OF FACTORING

FACTORABILITY The type of debt that are generally factorable is called factorability. Sale of capital goods, consignment sale and sale or return type sale are not accepted for factoring. The receivables of manufacturing companies and service sector industries such as travelling, telecommunication, software etc.. are covered under factoring.

FACTOR CHARGES There are three charges for the factoring service provided: 1. Service charge for sale ledger maintenance, collection etc.. 2. Interest charge for the advance made upfront to the client. 3. Nominal process charge for processing the proposals.

BENEFITS OF FACTORING Substitutes market credit Effective receivables management Liquidity No collaterals Cash discounts Credit management Benefits to exporters and importers Advisory

FORMS OF FACTORING Full factoring Recourse and Non-recourse factoring Advance factoring Maturity factoring Undisclosed factoring Invoice discounting Purchase bill factoring Export factoring

PROBLEMS OF FACTORING Customers making payment directly to factor has not found favour with customers. It is done only for selected good quality receivables identified by the factor. Global trends in factoring show that, it is increasingly accepted as a tool of financing not only in industrialised countries but also in emerging countries.

FACTORING INDUSTRY : OVERVIEW GLOBAL PERSPECTIVE In Europe and Asia, the industry is well established. Growth in Asian countries is also considerably high. Growing volumes of international trade has opened up opportunities for factoring industry. Contd…

FACTORING INDUSTRY : OVERVIEW FACTORING IN INDIA: Factoring was introduced in India in 1991. It was the outcome of the recommendations of Kalyanasundaram committee appointed by the RBI in 1988. India has seven factoring companies that are engaged in international factoring and domestic factoring. Contd…

The reason for slow growth is the absence of factoring law in India. Factoring industry in India has seen a sluggish growth since its introduction in 1991. The reason for slow growth is the absence of factoring law in India. bharath

FORFAITING It is financing as well as risk management tool to the exporters. The term forfaiting in French means ‘relinquishing the rights’. It enables the exporter to convert their credit sales into cash sales by discounting their receivables with the forfaiter. Contd… bharath

It is always ‘without recourse’ arrangement. The receivables are evidenced by letter of credit, bill of exchange, promisory notes etc.. The period of credit may vary from 90 days to 10 years. EXIM bank offers forfaiting service in India. bharath

FORFAITING PROCESS Five parties involved – exporter, exporter’s bank, importer, importer’s bank and the forfaiter. Exporter and importer negotiate the terms. Exporter approaches the forfaiting agency. Forfaiter collects the details about the importer. Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved. bharath

Discount rate should be approved by EXIM bank. Forfaiter specifies the discount rate which depends on nature and extent of risk. Discount rate should be approved by EXIM bank. Exporter quotes the price including discount rate, commitment charge on sale price to importer. Exporter will sign a commercial contract with importer and simultaneously exporter will execute the forfaiting contract. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved. bharath

“Financial Services” by R Shanmugham Forfaiter specifies the discount rate which depends on nature and extent of risk. Exporter discounts the bill with forfaiter. Forfaiter presents the bill to the importer for payment on due date. He can also sell this bill in the secondary market. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved. bharath

FACTORING vs FORFAITING 1. Open account sales. Transaction backed by L/c. 2. It is a continuous arrangement. Transaction based. 3. Does not provide 100% financing immediately. Discount the entire value of export receivables. 4. Financing and receivables management. Financing and risk management. 5. Participates in credit rating decisions of the client. Relies on guarantee provided by the importer’s bank. 6. Collection of receivables is the responsibility. No such responsibility. 7. With or without recourse. Always without recourse. 8. It is adopted in domestic and export trade. This is for export trade transaction. 9. Maturity period is short. Maturity period may range from 90 days to 10 years. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved. bharath

ADVANTAGES OF FORFAITING It is a risk management tool. It simplifies the documentation and speeds up trade finance decisions. It enables one to get his earnings upfront. It helps the exporter to offer longer credit terms. It helps the exporter to sell even to countries which does not have ECGC cover. It is also used by importers to reduce the cost of imports. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved. bharath

CONCLUSION Factoring can be done for domestic as well as export receivables. Advance upto 80%-90% immediately. They also provide service like collection, sales ledger maintenance etc.. Forfaiting finance is for export transaction. It is a financing and risk management tool. The utility rate of forfaiting service in India is low. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved. bharath