1. Factoring

2. 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.

3. 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.

4. 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)

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

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

7. 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

8. 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.

9. 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

10. 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.