Bill Discounting

Factoring &

Forfaiting

BILL DISCOUNTING

While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customer's account. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment.

CONDITIONS

A bill must be a usance bill.

It must have been accepted and bears at

least two good signatures (e.g. of reputable

individuals, companies or banks etc.)

The Bank will normally only discount trade

bills.

Where a usance bill is drawn at a fixed

period after sight the bill must be accepted to

establish the maturity.

CONDITIONS

The discount should be based on real trade

background.

The discount tenor starts from the date of

discount and expires at the maturity of the

bill.

DIFFERENT TYPES OF BILLS

DISCOUNTING

Sales bill discounting (Drawer bill

discounting)

Supplier bill discounting (Drawee bill

discounting)

LC Bill discounting

What is factoring?

Factoring is an ongoing arrangement between the

client and the factor, where the sales of goods and

services are made on open account terms and the

invoices for the same are assigned to the factor

regularly for the purpose of funding, collection and

sales ledger administration.

Factoring involves a long-term relationship between

the buyer and the seller with the whole turnover

being assigned to the factoring company.

Origin

Came into existance in the year 1920

It was not an organised sector that time

Association of British Factors(ABF) came in 1976

Nearly 90% of global factoring turnover comes from

USA & Europian countries

RBI appointed the C.S.Kalyanasundaram Committee

(1988)

It suggested to start factoring by a bank through its

subsidiary

As of today,

Worldwide, factoring volume is more than

USD 700 billion a year

Spread over nearly 60 countries and

covering more than 1,00,000 businesses.

Particularly in developed countries, factoring

is an accepted way of conducting business.

Why use Factoring?

Through the use of Factoring receivables are instantly converted into cash leading to improved cash flows that can help funding of future growth.

It facilitate an efficient follow up of payments from buyers, which is made possible through relationships developed by factors with client’s buyers.

Factoring provides credit protection for export sales which enables to do business with buyers who are unwilling to open Letters of Credit.

Factoring also provides other peripheral services such as advisory services, credit assessment, etc.

What are the types of factoring arrangement?

There are basically two types of Factoring

arrangements:

1) Domestic Factoring- If you are selling in

India.

2) International Export Factoring- If you are

exporting form India.

Domestic Factoring

The factoring arrangement where all the

three- the factor, the seller and the buyer are

in the same country, subject to the same

laws.

International Factoring

The factoring arrangement, where the seller

and the buyer are in two different countries

involving co-operation between two factoring

companies, one in the seller’s country

(Export Factor) and the other in the buyer’s

country (Import Factor)

Major Types of Factoring

Non-Recourse Factoring - It is the most comprehensive type of factoring arrangement offering all types of services namely:

Finance

Sales Ledger Administration

Collection

Debt Protection

Advisory Services

It gives protection against bad debts to the client. In other words, in case the customer fails to pay, the factor will have ‘no recourse’ to the client and will have to absorb the bad debts himself.

Recourse Factoring

In this type of factoring arrangement, the

factor provides all types of facilities except

debt protection. In other words, the client is

responsible for any bad debts incurred.

Invoice Discounting

In this type of factoring arrangement, only

finance is provided and no other service is

offered.

Undisclosed Factoring Or Open Account Receivables

The factor does not follow up or collect

payment from the customer. The customer

may not be aware of the factoring

arrangement and pays the client directly. The

factor receives payment of invoices through

the client.

Factoring Charges

Finance Charge - It represents the interest

on funds made available to the client by way

of prepayment against purchase of approved

invoices.

Service Charge - The charge levied for

rendering non-funding services such as

collection, sales ledger maintenance and

other advisory services.

How much advance can Client get?

Advances are made as a percentage of

invoice value based on criteria, such as,

quality of receivables, number and quality of

the buyers and client’s requirements.

Typically 80 % of invoice value is advanced.

Advantages (to the client)

Immediate conversion of cash sale

Competitive credit terms

Accelerate the production cycle

Free from tensions

Efficient W.Cap. Management

Assessing quality of debtors

Expansion of business

Advantages

To the Buyers

– Adequate credit facilities

– Getting periodical statement from the factor

– No affect on quality of goods, contractual

obligations etc.

Benefits of International Factoring

To the Exporter

– Deals with only one factor

– He gets specialised knoweledge

– Risk of B/D are reduced

To the Importer

– Pays the invoice in the same country

– Gets better credit terms

Factoring is not suitable under following cases -

a) where large volume of cash sales take place. b) engaged in speculative business. c) selling highly specialized capital equipments or made-to-order goods. d) where credit period offered to the buyers is more than 180 days. e) where there is Consignment Sale or 'Sale or Return Arrangements'. f) where sales are to the sister / associated companies . g) where sales are to the public at large, etc.

FCI (Factors Chain International)

FCI is a global network of leading factoring countries

It helps its members achieving competitive advantage

through:

– A global network

– Modern & effective communication system

– Reliable legal framework

– Standard procedures

– Universal quality

– World wide promotion

– Training programmes

Factoring Profile(India)

Number of factoring companies – 08

From Domestic factoring turnover – 1450

(million euros)

From International factoring turnover - 175

(million euros)

From Total factoring turnover - 1625 (million

euros)

Large number of industries

Covered under factoring, including

automobiles, pharmaceuticals, textile,

garment and engineering.

In addition to the manufacturing sector, the

services sector industries, such as, traveling,

telecommunications, software services and

so on are also suitable for factoring.

FCI Members

Can Bank Factors Ltd. - Bangalore www.canbankfactors.com

City Bank – Mumbai

ECGC of India Ltd.- Mumbai

Foremost Factors Ltd.- New Delhi www.foremostfactors.net

Global Trade Finance Ltd.- Mumbai www.gtfindia.com

SBI Factors & Commercial Services Pvt.Ltd – Mumbai

www.sbifactors.com

The HSBC Ltd. - Mumbai www.hsbc.co.in

Bill Discounting Vs Factoring

Individually Acceptance

Short term duration

High cost

More paper work

3 days grace period

Requirement of original documents

Off B/s can not be Domestic

No assignment of debt

One time acceptance

Long term

Low cost

Less paper work

Higher grace period

Copies -o.k.

Off B/s is possible

Both domestic & International

Assignment of debt

Forfaiting

Forfaiting, or Medium-Term Capital Goods

Financing, means selling a bill of exchange, at a

discount, to a third party, the Forfaiter, who collects

the payment from an, essentially, overseas

customer, through a collateral bank(s), and, thus,

assuming the underlying responsibility of exporters

and simultaneously providing trade finance for

importers by converting a short-term loan to a

medium term one.

Done on a non - recourse basis

Used for international trade transactions, usually for

transactions not less than $100,000

Tenor of instrument ranges from 180 days to 10 years

payments are made quarterly, semi-annually, annually, or

on a bullet basis

Not so Popular as People

are suspicious of its simplicity

coupled with a lack of complex documentation

Forfaiting…

Information the Forfaiter needs

who the buyer is and his nationality;

what goods are being sold;

details regarding the value and currency of the contract;

the date and duration of the contract,including the credit period and number and timing of payments (including any interest rate already agreed with the buyer)

evidence of debt that will be used (either promissory notes, bills of exchange, letters of credit)

the identity of the guarantor of payment (or avalor).

Documents required by Forfaiter from exporter

Copy of supply contract, or of its payment terms

Copy of signed commercial invoice

Copy of shipping documents including certificates of receipt, railway bill, airway will, bill of lading or equivalent documents

Letter of assignment and notification to the guarantor

Letter of guarantee, or aval (standby letters of credit may also be used)

Forfaiting Charges

Forfaiters try to ensure that the buyer, not the seller,

incurs charges involved in a Forfait transaction.

Charges depend on

the level of interest rates relevant to the currency of

the underlying contract at the time of the Forfaiter's

commitment

the Forfaiter's assessment of the credit risks related

to the importing country and to the avalizing (or

guaranteeing) bank

Forfaiting vs Export Factoring Similarities

Done on Non – recourse basis

Common features for advance payment

Differences

Forfaiting Export Factoring

The entire value of bill is

discounted by forfaiter

Discounted value ranges

between 75 – 85 %

Involvement of Availing Bank Export factor assesses credit

worthiness

Purely a financing arrangement Also includes ledger

administration, collection, etc

Long term Short term

Exchange rate fluctuations are

guarded against

Exchange rate fluctuations not

guarded against