Factoring

Meaning Factoring may broadly be defined as the relationship, created by an agreement, between the seller of goods /services and a financial institution called the factor, whereby the latter purchases the receivables of the former and also controls and administers the receivables of the former.

Mechanism of Factoring An agreement is entered into between the selling firm and the factor firm. The sales documents should contain the instructions to make payments directly to the factor who is assigned the job of collection of receivables. When the payment is received by the factor, the account of the selling firm is credited by the factor after deducting the fees, charges, interest, etc The factor may provide advance finance to the selling firm if the conditions of the agreement so require.

Sale of Goods(2) Agreement(1) Selling Firm Factor Customer Receivables Invoice Copy(3) Advance Payment /Discounting(4) Payments Final Payment after deducting fess and charges If any (5)

Types of Factoring Recourse Factoring and Non Recourse Factoring Advance and Mature Factoring Conventional or Full Factoring Domestic and Export Factoring Limited Factoring Selected Seller Based Factoring Disclosed and Undisclosed Factoring

Functions of Sales Ledger Administration of Sales Ledger Collection of receivables Provision of Finance Protection Against Risk Advisory Services

Advantages of Factoring Improve his efficiency Improving his Credit Standing Position Provides Flexibility to the Company Improved Cash Flows Meet Seasonal Demands Better Purchase Planning Help in Boosting the efficiency ratios Saves the management time and effort Avoid Bad Debts Ensures better management of receivables

Forfaiting The forfaiting has derived from a french term “a forfait” which means to forfeit(or surrender) one’s rights on something to some one else. Forfaiting is a mechanism of financing exports: By discounting export receivables Evidenced by bills of exchanges or promissory notes Without recourse to the seller(exporter) Carrying medium to long term maturities On a fixed rate basis upto 100% of the contract value.

Mechanism of Forfaiting The exporter and importer negotiate the proposed export sale contract. The forfaiter collects details about the importer, supply and credit terms, etc Forfaiter ascertains the country risk and credit risk involved. The forfaiter quotes the discount rate The exporter then quotes a cobtract price to the overseas buyer loading discount rate, commitment fee on the sale price of the goods to be exported. The exporter and forfaiter sign a contract Export takes place against documents guranteed by the importer bank The exporter discounts the bills with the forfaiter and the latter presents the same to the importer for payment on due date on even sell it in secondary market

Benefits It frees the exporter from political or commercial risks from abroad. Forfaiting offers without recourse finance to an exporter. It does not effect the exporter’s borrowing limits/capacity It relieves the exporter from botheration of credit administration and collection problems It is specific to a transaction. It does not require long term banking relationship with forfaiter Exporter saves money on insurance costs because forfaiting eliminates the need for export credit insurance.