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1. CHAPTER NO :- 1 INTRODUCTION TO BANKING
Banking is intermediary that deposit and channels those deposit into
activities, either directly or through capital markets. A bank connects
customers with capital deficit to customers with capital surplus.
The purpose of this section is to cover the basics of banking, especially
on how to select a bank and a checking account. Before we begin, here
are a few basic facts to get you started. First, a bank account enables you
to access your money quickly and easily, such as by writing checks and
by withdrawing money from an ATM. Second, a bank is the safest place
you can put your money, because funds in U.S. bank accounts are insured
against loss by the federal government for up to $100,000 per depositor.
Third, you pay for the convenience and safety of banking. Some accounts
pay interest while others don't, but those interest rates will be well below
the rates offered by mutual fund companies and brokerages. You can earnsignificantly more by putting it into a certificate of deposit, but to do so
you'll have to agree not to withdraw it for a fixed period of time . Fourth,
bank fees may seem small, but they really add up. If you're not paying
attention, a simple checking account could cost you $200-250 a year,
after the monthly fee, the per-check fee and ATM charges are added up.
And while many banks offer "free" checking if you maintain a substantial
balance, the account isn't free at all, since you could be making a few
hundred dollars a year by investing that money elsewhere. With this in
mind, let's discuss the specifics
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HISTORY
Indian merchants in Calcutta established the Union Bank in 1839, but it
failed in 1848 as a consequence of the economic crisis of 1848-49. The
Allahabad Bank, established in 1865 and still functioning today, is the
oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues
stock and requires shareholders to be held liable for the company's debt)
It was not the first though. That honor belongs to the Bank of Upper
India, which was established in 1863, and which survived until 1913,
when it failed, with some of its assets and liabilities being transferred to
the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire
from the Confederate States, promoters opened banks to finance trading
in Indian cotton. With large exposure to speculative ventures, most of the
banks opened in India during that period failed. The depositors lost
money and lost interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of Europeans for next
several decades until the beginning of the 20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s.
The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860,
and another in Bombay in 1862; branches in Madras and Puducherry,
then a French colony, followed. HSBC established itself in Bengal in
1869. Calcutta was the most active trading port in India, mainly due to
the trade of the British Empire, and so became a banking center.
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The first entirely Indian joint stock bank was the Oudh Commercial
Bank, established in 1881 in Faizabad. It failed in 1958. The next was the
Punjab National Bank, established in Lahore in 1895, which has survived
to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing
through a relative period of stability. Around five decades had elapsed
since the Indian Mutiny, and the social, industrial and other infrastructure
had improved. Indians had established small banks, most of which served
particular ethnic and religious communities.
The presidency banks dominated banking in India but there were alsosome exchange banks and a number of Indian joint stock banks. All these
banks operated in different segments of the economy. The exchange
banks, mostly owned by Europeans, concentrated on financing foreign
trade. Indian joint stock banks were generally under capitalized and
lacked the experience and maturity to compete with the presidency and
exchange banks. This segmentation let Lord Curzon to observe, "In
respect of banking it seems we are behind the times. We are like some old
fashioned sailing ship, divided by solid wooden bulkheads into separate
and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks
inspired by the Swadeshi movement. The Swadeshi movement inspired
local businessmen and political figures to found banks of and for the
Indian community. A number of banks established then have survived to
the present such as Bank of India, Corporation Bank, Indian Bank, Bank
of Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private
banks in Dakshina Kannada and Udupi district which were unified earlier
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and known by the name South Canara ( South Kanara ) district. Four
nationalized banks started in this district and also a leading private sector
bank. Hence undivided Dakshina Kannada district is known as "Cradle of
Indian Banking".
During the First World War (1914-1918) through the end of the Second
World War (1939-1945), and two years thereafter until the independence
of India were challenging for Indian banking. The years of the First
World War were turbulent, and it took its toll with banks simply
collapsing despite the Indian economy gaining indirect boost due to war-
related economic activities. At least 94 banks in India failed between
1913 and 1918 as indicated in the following table:
Years Number of banks
that failed Authorized capital
(Rs. Lakhs) Paid-up Capital
(Rs. Lakhs)
1913 12 274 35
1914 42 710 109
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1915 11 56 5
1916 13 231 4
1917 9 76 25
1918 7 209 1
ORIGIN OF THE BANK
The word bank was borrowed in Middle English from Middle French
banque, from Old Italian banca, from Old High German banc, bench,
counter. Benches were used as desks or exchanged counter during the
renaissance by Florentine banker, who used to make their transactions
atop desks covered by green tablecloths.
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BANK DEFINITION
Bank is financial intermediary that accepts deposits and channels and
those deposits into lending activities, either directly or through capital
market.
The essential function of a bank is to provide services related to the
storing of value and the extending of credit. The evolution of banking
dates back to the earliest writing, and continues in the present where a
bank is a financial institution that provides banking and other financial
services. Currently the term bank is generally understood an institution
that holds a banking license. Banking license are granted by financial
supervision authorities and provide rights to conduct the most
fundamental banking services such as accepting deposits and making
loans. There are also financial institutions that provide certain banking
services without meeting the legal definition of a bank, also called non-bank. Banks are a subset of the financial services industry.
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BANKING IN INDIA
Banking in India originated in the last decades of the 18th century. The
first banks were The General Bank of India, which started in 1786, and
Bank of Hindustan, which started in 1790; both are now defunct. The
oldest bank in existence in India is the State Bank of India, which
originated in the Bank of Calcutta in June 1806, which almost
immediately became the Bank of Bengal. This was one of the three
presidency banks, the other two being the Bank of Bombay and the Bank
of Madras, all three of which were established under charters from the
British East India Company. For many years the Presidency banks acted
as quasi-central banks, as did their successors. The three banks merged in
1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India.
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CHAPTER:-2 FACTORING AS A BANKING SERVICES
INTRODUCTION
Factoring is an arrangement under which a financial institution (called
factor) undertakes the task of collecting the book debt of its client in
return for a service charge in the form of discount or rebate.
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One of the oldest forms of business financing, factoring is the cash-
management tool of choice for many companies. Factoring is very
common in certain industries, such as the clothing industry, where long
receivables are part of the business cycle.
In a typical factoring arrangement, the client (you) makes a sale, delivers
the product or service and generates an invoice. The factor (the funding
source) buys the right to collect on that invoice by agreeing to pay you
the invoice's face value less a discount--typically 2 to 6 percent. The
factor pays 75 percent to 80 percent of the face value immediately and
forwards the remainder (less the discount) when your customer pays.
Because factors extend credit not to their clients but to their clients'
customers, they are more concerned about the customers' ability to pay
than the client's financial status. That means a company with creditworthy
customers may be able to factor even if it can't qualify for a loan.
Once used mostly by large corporations, factoring is becoming more
widespread. Still, plenty of misperceptions about factoring remain.
Factoring is not a loan; it does not create a liability on the balance sheet
or encumber assets. It is the sale of an asset--in this case, the invoice. And
while factoring is considered one of the most expensive forms of
financing, that's not always true. Yes, when you compare the discount
rate factors charge against the interest rate banks charge, factoring costs
more. But if you can't qualify for a loan, it doesn't matter what the interest
rate is. Factors also provide services banks do not: They typically take
over a significant portion of the accounting work for their clients, help
with credit checks, and generate financial reports to let you know where
you stand.
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The idea that factoring is a last-ditch effort by companies about to go
under is another misperception. Walt Plant, regional manager with Altres
Financial, a national factoring firm based in Salt Lake City, says the
opposite is true: "Most of the businesses we deal with are very much in
an upward cycle, going through extremely rapid growth." Plant says you
may be a candidate for factoring if your company regularly generates
commercial invoices and you could benefit from reducing the time
receivables are outstanding. Factoring may provide the cash you need to
fund growth or to take advantage of early-payment discounts suppliers
offer.
Factoring is a short-term solution; most companies factor for two years or
less. Plant says the factor's role is to help clients make the transition to
traditional financing. Factors are listed in the telephone directory and
often advertise in industry trade publications. Your banker may be able to
refer you to a factor. Shop around for someone who understands your
industry, can customize a service package for you, and has the financial
resources you need
DEFINATION
A financing method in which a business owner sells accounts receivable
at a discount to a third-party funding source to raise capital.
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Factoring is a financial transaction whereby a business job sells its
accounts receivable (i.e., invoices) to a third party (called a factor) at a
discount in exchange for immediate money with which to finance
continued business.
Factoring differs from a bank loan in three main ways.
1. First, the emphasis is on the value of the receivables (essentially a
financial asset), not the firms credit worthiness.
2. Secondly, factoring is not a loan it is the purchase of a financial
asset (the receivable)
3. Finally, a bank loan involves two parties whereas factoring
involves three.
o The three parties directly involved are: the one who sells the
receivable, the debtor, and the factor.
o The receivable is essentially a financial asset associated with the
debtor's liability to pay money owed to the seller (usually for work
performed or goods sold).
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o The seller then sells one or more of its invoices (the receivables)
at a discount to the third party, the specialized financial organization (aka
the factor), to obtain cash.
o The sale of the receivables essentially transfers ownership of the
receivables to the factor, indicating the factor obtains all of the rights and
risks associated with the receivables.
o Accordingly, the factor obtains the right to receive the payments
made by the debtor for the invoice amount and must bear the loss if the
debtor does not pay the invoice amount.
o Usually, the account debtor is notified of the sale of the
receivable, and the factor bills the debtor and makes all collections.
o Critical to the factoring transaction, the seller should never collect
the payments made by the account debtor, otherwise the seller could
potentially risk further advances from the factor.
There are three principal parts to the factoring transaction;
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a.) the advance, a percentage of the invoice face value that is paid to the
seller upon submission,
b.) the reserve, the remainder of the total invoice amount held until the
payment by the account debtor is made and
c.) the fee, the cost associated with the transaction which is deducted
from the reserve prior to it being paid back the seller. Sometimes the
factor charges the seller a service charge, as well as interest based on how
long the factor must wait to receive payments from the debtor
CONCEPT OF FACTORING SERVICES
Modern factoring involves a continuing arrangement under which a
financing institution assumes the credit and collection functions for its
client, purchases its receivables as they arise ( with or without recource
to him for credit losses), maintains the sales ledger, attends to other book
keeping relating to such accounts receivable and perform other auxiliary
function.
HISTORY
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Factoring's origins lie in the financing of trade, particularly international
trade. Factoring as a fact of business life was underway in England prior
to 1400. It appears to be closely related to early merchant banking
activities. The latter however evolved by extension to non-trade related
financing such as sovereign debt. Like all financial instruments, factoring
evolved over centuries. This was driven by changes in the organization of
companies; technology, particularly air travel and non-face to face
communications technologies starting with the telegraph, followed by the
telephone and then computers. These also drove and were driven by
modifications of the common law framework in England and the United
States.
Governments were latecomers to the facilitation of trade financed by
factors. English common law originally held that unless the debtor was
notified, the assignment between the seller of invoices and the factor was
not valid. The Canadian Federal Government legislation governing the
assignment of moneys owed by it still reflects this stance as does
provincial government legislation modeled after it. As late as the current
century the courts have heard arguments that without notification of the
debtor the assignment was not valid. In the United States it was only in
1949 that the majority of state governments had adopted a rule that the
debtor did not have to be notified thus opening up the possibility of non-
notification factoring arrangements.
Originally the industry took physical possession of the goods, provided
cash advances to the producer, financed the credit extended to the buyer
and insured the credit strength of the buyer. In England the control over
the trade thus obtained resulted in an Act of Parliament in 1696 to
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mitigate the monopoly power of the factors. With the development of
larger firms who built their own sales forces, distribution channels, and
knowledge of the financial strength of their customers, the needs for
factoring services were reshaped and the industry became more
specialized.
By the twentieth century in the United States factoring became the
predominant form of financing working capital for the then high growth
rate textile industry. In part this occurred because of the structure of the
US banking system with its myriad of small banks and consequent
limitations on the amount that could be advanced prudently by any one of
them to a firm. In Canada, with its national banks the limitations were far
less restrictive and thus factoring did not develop as widely as in the US.
Even then factoring also became the dominant form of financing in the
Canadian textile industry.
Today factoring's rationale still includes the financial task of advancing
funds to smaller rapidly growing firms who sell to larger more
creditworthy organizations. While almost never taking possession of the
goods sold, factors offer various combinations of money and supportive
services when advancing funds.
Factors often provide their clients four key services: information on the
creditworthiness of their prospective customers domestic and
international; maintain the history of payments by customers (i.e.,
accounts receivable ledger); daily management reports on collections;
and, make the actual collection calls. The outsourced credit function both
extends the small firms effective addressable marketplace and insulates it
from the survival-threatening destructive impact of a bankruptcy or
financial difficulty of a major customer. A second key service is the
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operation of the accounts receivable function. The services eliminate the
need and cost for permanent skilled staff found within large firms.
Although today even they are outsourcing such backoffice functions.
More importantly, the services insure the entrepreneurs and owners
against a major source of a liquidity crises and their equity.
In the latter half of the twentieth century the introduction of computers
eased the accounting burdens of factors and then small firms. The same
occurred for their ability to obtain information about debtors
creditworthiness. Introduction of the Internet and the web has accelerated
the process while reducing costs. Today credit information and insurance
coverage is available any time of the day or night on-line. The web has
also made it possible for factors and their clients to collaborate in real
time on collections. Acceptance of signed documents provided by
facsimile as being legally binding has eliminated the need for physical
delivery of originals, thereby reducing time delays for entrepreneurs.
By the first decade of the twenty first century a basic public policy
rationale for factoring remains that the product is well suited to the
demands of innovative rapidly growing firms critical to economic growth.
A second public policy rationale is allowing fundamentally good business
to be spared the costly management time consuming trials and
tribulations of bankruptcy protection for suppliers, employees and
customers or to provide a source of funds during the process of
restructuring the firm so that it can survive and grow.
RBI GUIDELINES ON FACTORING SERVICES BY BANKS
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The banks with the prior approval of the Reserve Bank of India could
form subsidiary companies for undertaking factoring services. The
subsidiaries formed should primarily be engaged in this activity and such
other activities as are incidental thereto.
Alternatively, banks may opt to undertake factoring services
departmentally, for which prior approval of the RBI is not necessary. The
banks should, however, report to the RBI together with the names of the
branches from where this activity is taken up. The banks should comply
with the following prudential guidelines when they undertake factoring
services departmentally:
(i) As this activity requires skilled personnel and adequate
infrastructural facilities, it should be undertaken only by certain select
branches of banks.
(ii) This activity should be treated on par with loans and advances and
should accordingly be given risk weight of 100% for calculation of
capital to risk asset ratio.
(iii) The facilities extended by way of factoring services would be
covered within the exposure ceilings with regard to single borrower (15%
of the Bank's capital funds, 20% in case of infrastructure projects) and
group of borrowers (40% of the bank's capital funds, 50% in case of
infrastructure projects).
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(iv) Banks should maintain a balanced portfolio of factoring services vis-
a vis the aggregate credit. Their exposure to such activity should not
exceed 10% of total advances.
(v) Banks undertaking factoring services departmentally should
carefully assess the client's working capital needs taking into account the
invoices purchased. Factoring service should be extended only in respect
of those invoices which represent genuine trade factoring services; the
client is not over financed transactions. Banks should take particular care
to ensure that by extending factoring services, the client is not over
financed.
REASON
Factoring is a method used by a firm to obtain cash when the available
cash balance held by the firm is insufficient to meet current obligations
and accommodate its other cash needs, such as new orders or contracts.
The use of factoring to obtain the cash needed to accommodate the firms
immediate Cash needs will allow the firm to maintain a smaller ongoing
Cash Balance. By reducing the size of its cash balances, more money is
made available for investment in the firms growth. Debt factoring is also
used as a financial instrument to provide better cash flow control
especially if a company currently has a lot of accounts receivables with
different credit terms to manage. A company sells its invoices at a
discount to their face value when it calculates that it will be better off
using the proceeds to bolster its own growth than it would be by
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effectively functioning as its "customer's bank." Accordingly, Factoring
occurs when the rate of return on the proceeds invested in production
exceed the costs associated with Factoring the Receivables. Therefore,
the tradeoff between the return the firm earns on investment in production
and the cost of utilizing a Factor is crucial in determining both the extent
Factoring is used and the quantity of Cash the firm holds on hand.
Many businesses have Cash Flow that varies. A business might have a
relatively large Cash Flow in one period, and might have a relatively
small Cash Flow in another period. Because of this, firms find it
necessary to both maintain a Cash Balance on hand, and to use such
methods as Factoring, in order to enable them to cover their Short Term
cash needs in those periods in which these needs exceed the Cash Flow.
Each business must then decide how much it wants to depend on
Factoring to cover short falls in Cash, and how large a Cash Balance it
wants to maintain in order to ensure it has enough Cash on hand during
periods of low Cash Flow.
Generally, the variability in the cash flow will determine the size of the
Cash Balance a business will tend to hold as well as the extent it may
have to depend on such financial mechanisms as Factoring. Cash flow
variability is directly related to 2 factors:
a. The extent Cash Flow can change,
b. The length of time Cash Flow can remain at a below average
level.
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If cash flow can decrease drastically, the business will find it needs large
amounts of cash from either existing Cash Balances or from a Factor to
cover its obligations during this period of time. Likewise, the longer a
relatively low cash flow can last, the more cash is needed from another
source (Cash Balances or a Factor) to cover its obligations during this
time. As indicated, the business must balance the opportunity cost of
losing a return on the Cash that it could otherwise invest, against the costs
associated with the use of Factoring.
The Cash Balance a business holds is essentially a Demand for
Transactions Money. As stated, the size of the Cash Balance the firm
decides to hold is directly related to its unwillingness to pay the costs
necessary to use a Factor to finance its short term cash needs. The
problem faced by the business in deciding the size of the Cash Balance it
wants to maintain on hand is similar to the decision it faces when it
decides how much physical inventory it should maintain. In this situation,
the business must balance the cost of obtaining cash proceeds from a
Factor against the opportunity cost of the losing the Rate of Return it
earns on investment within its business. The solution to the problem is:
Where
CB is the Cash Balance
nCF is the average Negative Cash Flow in a given period
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to pay the supplier to be their bank and reduce the equity the customer
needs to run their business. To counter this it is a widespread practice to
offer a prompt payment discount on the invoice. This is commonly set out
on an invoice as an offer of a 2% discount for payment in ten days. {Few
firms can be relied upon to systematically take the discount, particularly
for low value invoices - under $100,000 - so cash inflow estimates are
highly variable and thus not a reliable basis upon which to make
commitments.} Invoice sellers can also seek a cash discount from a
supplier of 2 % up to 10% (depending on the industry standard) in return
for prompt payment. Large firms also use the technique of factoring at the
end of reporting periods to dress their balance sheet by showing cashinstead of accounts receivable. There are a number of varieties of
factoring arrangements offered to invoice sellers depending upon their
specific requirements. The basic ones are described under the heading
Factors below.
FACTORS
When initially contacted by a prospective invoice seller, the factor first
establishes whether or not a basic condition exists, does the potential
debtor(s) have a history of paying their bills on time? That is, are they
creditworthy? (A factor may actually obtain insurance against the
debtors becoming bankrupt and thus the invoice not being paid.) The
factor is willing to consider purchasing invoices from all the invoice
sellers creditworthy debtors. The classic arrangement which suits most
small firms, particularly new ones, is full service factoring where the
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debtor is notified to pay the factor (notification) who also takes
responsibility for collection of payments from the debtor and the risk of
the debtor not paying in the event the debtor becomes insolvent, non
recourse factoring. This traditional method of factoring puts the risk of
non-payment fully on the factor. If the debtor cannot pay the invoice due
to insolvency, it is the factor's problem to deal with and the factor cannot
seek payment from the seller. The factor will only purchase solid credit
worthy invoices and often turns away average credit quality customers.
The cost is typically higher with this factoring process because the factor
assumes a greater risk and provides credit checking and payment
collection services as part of the overall package. For firms with formalmanagement structures such as a Board of Directors (with outside
members), and a Controller (with a professional designation), debtors
may not be notified (i.e., non-notification factoring). The invoice seller
may not retain the credit control function. If they do then it is likely that
the factor will insist on recourse against the seller if the invoice is not
paid after an agreed upon elapse of time, typically 60 or 90 days. In the
event of non-payment by the customer, the seller must buy back the
invoice with another credit worthy invoice. Recourse factoring is
typically the lowest cost for the seller because they retain the bad debt
risk, which makes the arrangement less risky for the factor.
Despite the fact that most large organizations have in place processes to
deal with suppliers who use third party financing arrangements
incorporating direct contact with them, many entrepreneurs remain veryconcerned about notification of their clients. It is a part of the invoice
selling process that benefits from salesmanship on the part of the factor
and their client in its conduct. Even so, in some industries there is a
perception that a business that factors its debts is in financial distress.
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There are two methods of factoring: recourse and non-recourse. Under
recourse factoring, the client is not protected against the risk of bad debts.
On the other hand, the factor assumes the entire credit risk under non-
recourse factoring i.e., full amount of invoice is paid to the client in the
event of the debt becoming bad.
INVOICE PAYERS (DEBTORS)
Large firms and organizations such as governments usually have
specialized processes to deal with one aspect of factoring, redirection of
payment to the factor following receipt of notification from the third
party (i.e., the factor) to whom they will make the payment. Many but not
all in such organizations are knowledgeable about the use of factoring by
small firms and clearly distinguish between its use by small rapidly
growing firms and turnarounds.
Distinguishing between assignment of the responsibility to perform the
work and the assignment of funds to the factor is central to the
customer/debtors processes. Firms have purchased from a supplier for a
reason and thus insist on that firm fulfilling the work commitment. Once
the work has been performed however, it is a matter of indifference who
is paid. For example, General Electric has clear processes to be followed
which distinguish between their work and payment sensitivities.
Contracts direct with US Government require an Assignment of Claims
which is an amendment to the contract allowing for payments to third
parties (factors).
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RISKS
The most important risks of a factor are:
Counter party credit risk related to clients and risk covered
debtors. Risk covered debtors can be reinsured, which limit the risks of a
factor. Trade receivables are a fairly low risk asset due to their short
duration.
External fraud by clients: fake invoicing, mis-directed payments,
pre-invoicing, not assigned credit notes, etc. A fraud insurance policy and
subjecting the client to audit could limit the risks.
Legal, compliance and tax risks: large number of applicable laws
and regulations in different countries.
Operational risks, such as contractual disputes.
Uniform Commercial Code (UCC-1) securing rights to assets.
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IRS liens associated with payroll taxes etc.
ICT risks: complicated, integrated factoring system, extensive data
exchange with client.
REVERSE FACTORING
We can see nowadays that there is a new process developing: the reverse
factoring, or supply chain finance. It uses the strengths of the factoring
process, but instead of being started by the supplier, it is the buyer that
creates the solution toward a factor. That way, the buyer secures thefinancing of the invoice, and the supplier gets a better interest rate
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CHAPTER: - 3 TYPES OF FACTORING
I. Maturity factoring
When financing is not required, an arrangement is made which comprises
full administration of the sales ledger, collection from debtors and
protection against bad debts. This service is called maturity factoring and
can be defined as a full service factoring without the financing element.
This lack of financing makes the guarantees different. The risk consists
only in debtors' risk; there is no seller's risk. For the same reason, there
are no financing commissions, the factor being remunerated trough
commission taxes.
The factor pays the client for the debts sold in one of the following ways:
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after a certain period from the date of invoicing (i.e. 60 days), this being
known as the maturity period. The benefit of this method is that the client
knows exactly when he will get paid and can adjust his cash flow
accordingly.
When every debtor pays his invoice or when the debtor is insolvable, on
the condition that the non-payment risk is insured
To apply for this service, the client is supposed to have enough finance
resources; he demands the factor to improve his weak debt
administration, to diminish his indirect costs and to ensure coverage
against non-payment risk.
II.Full factoring
Factoring in its full form, or traditional factoring, is a continuous
relationship between a factor and the client (the supplier of goods and
services to trade customers), in which the factor purchases substantially
all the trade debts of his client, arising from such sales, in the normal
course of doing business. This comprises all the factoring services, so that
in return for the agreed fees and finance charges, the client receives:
Financing
Debt administration
Collection of debts due
risk coverage, in case of non-payment of debt
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This type of factoring is best suited for small and medium size
companies, which have a swift development and they need not only
financing, but also administrative support and risk coverage. It is also
suited for large companies who target their exports to new markets.
The factor takes over the clients' debts, becoming solely debtor towards
the client. The transfer of debts' ownership is normally accompanied by
the submission to the factor of the copies of invoices that represent the
debts sold. In some cases, the factor may require also the submission of
the original invoices, to be able to forward them to the debtors,
accompanied by copies of retention by the factor. The contract between
the client and the factor is totally notified to the debtors. Many factors
arrange nowadays for their large clients to notify them the debts by
electronic means.
The factor is responsible towards the client for the purchase price of the
debt assigned. The purchase price is normally the amount of any discount
or other allowance granted to the debtor and, in some cases, after the
deduction of the factor's charges. The factor will credit the client's
account with the purchase price of debts sold and as a corollary the client
may charge all his sales to the factor's account. The client will
consequently look to the factor alone for the collection of the invoices.
The final date for payment of the purchase price will be either a fixed
number of days after the invoice date (often referred to as the maturity
date), or when collection has been effected from the debtor.
To the extent that the factor has given approval of the debts, the factor
purchases them without recourse to the client. The client thus receives
full protection against bad debts provided that they do not sell to any
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debtor that the factor did not agree with, or to an extent greater than the
approval given by the factor (for debts approved and uncontested).
By making an early payment (prepayment or initial payment) on account
of a substantial part of the purchase price, the factor provides the finance
for the client to meet the debtors' trade credit requirements. Some factors
make such payment by way of an advance secured by their right to set off
against the full purchase price when due, whereas others provide for
prepayments as part payments of the purchase price.
The factor will make aretention of part of the purchase price of each debt,
so that in aggregate he will hold a sufficient balance to provide for anydebt to be charged back to the client by way of recourse for the non-
payment of an unapproved or disputed debt. However, the balance
credited for the purchase price of debts purchased less the retention may
normally be drawn by the client by way of prepayment at short notice.
III.Recourse factoring
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A large number of the factoring companies do not offer complete
factoring services, being specialized in recourse factoring. Although most
forms of factoring other than the full service are provided with full
recourse to the client in respect of the failure of the debtor to pay for any
reason, recourse factoring normally describes the service by which the
factor provides finance for the client and carries out the functions of sales
ledger administration and collections, but does not protect the client
against bad debt. The factor has full recourse", meaning the right to have
payment guaranteed or the debt repurchased by the client for debts unpaid
for any reason, including the insolvency of the debtor.
Thus, the services the client receives are:
Financing
Sales ledger administration
Collection of debts due
For every debt purchased by the factor, he will have the right to sell it (or
part of it) back to the client for the amount for which he credited the
purchase price originally, in addition to his charges (or be guaranteed in
full by the client) to the extent that the debtor shall not have settled the
debt by an agreed period after the invoice due date.
The period often agreed is 3 months or 90 days from the end of the month
in which the invoice is dated. Such a period postulates that in many
trades, in which it is common the payment to be due at the end of the
month following the one of the invoice, the factor must collect payment
within 2 months of the due date or the recourse may come into effect. It is
usual to provide that the factor will refrain from exercising his right of
recourse for a specified further period, in exchange of an additional
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charge paid by the client. In such case, the factor may require that an
additional retention be maintained against the purchase price of further
debts, so that in effect, the client will repay the amount paid by the factor
against, or on account of the purchase price of the unpaid debts. In this
way, in respect of debts that are seriously overdue, the client will remain
relieved from the collection function, but the finance for such debts may
be withdrawn. If it becomes irrecoverable, the recourse is then finally
exercised.
Approvals of credit on debtors' accounts are given by the factor, for the
purpose of specifying the amount of finance available against them or as
an advisory service to the client, or for both reasons.
Recourse Factoring is the most common of the strategies offered by
factoring companies. Recourse Factoring typically offers the least amount
of risk to the factoring company and in return has the lowest discount rate
to you.
Recourse Factoring is low risk is to the Factoring Company due to the
fact that the risk associated with the payment of the invoice remains with
the seller (you). If, due to unforeseen complications the invoice is not
paid by your customer within 90 days you becomes responsible for full
payment of the invoice. Recourse Factoring is generally used if the seller
is confident in their customers above average credit and repayment
history (usually 30-60 days). Although the low rate is enticing to the
seller they must decide if they wish to retain risk of non-payment.
Lowest Rates & Fees
24 Hour Fund Advance
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Credit Check on Debtor
Recourse factoring is like having an automobile with limited insurance
coverage if you get into an accident or damage somebodys property
those charges will come out of your pocket. The tradeoff is that these
services are generally much cheaper than obtaining full-coverage
insurance. With recourse factoring, if one of your clients defaults on a
payment, this money comes out of your own pocket.
IV. Non-Recourse Factoring
Factoring through a Non-Recourse Product constitutes a higher risk to the
factoring company. As with all factored invoices with factoring
companies the purchase is based on your customers' credit and their
ability to pay invoices in a timely matter. The difference is that the
factoring company purchases invoices and absorbes the credit risk
associated with the invoice.
That is to say if your customer does not pay the invoice for any credit
reason the factoring company absorbs the loss. This creates a higher risk
for the factoring company and as such a discount rate is charged along
with higher rate is charges along with stricter adherence to credit
underwriting of your customer.
Worry Free Transaction
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Low Rates & Fees
24 Hour Fund Advance
Knowledgeable & Friendly Account Managers
With non-recourse factoring, the factor, or insurance company in this
analogy, assumes all the risk. When you enter into a non-recourse
factoring agreement, the factoring company assumes all financial
responsibility for unpaid invoices. While this is a nice advantage to have,
just as full-coverage auto insurance is more expensive than basic car
insurance, you should expect to pay a lot more money for non-recourse
factoring services
CHAPTER:-4 FUNCTION OF FACTORING
As stated earlier the term factoring simply refers to the process of
selling trade debts of a company to a financial institution. But, in practice,
it is more than that.
Factoring involves the following functions:
1. Purchase and Collection of Debts
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Factoring envisages the sale of trade debts to the factors by the
company, i.e., the client. It is where factoring differs from discounting.
Under discounting, the financier simply discounts the debts backed by
account receivables of the client. He does so as an agent of the client.
But, under factoring, the factor purchases the entire trade debts and thus,
he becomes a holder for value and not an agent. Once the debts are
purchased by the factor, collection of those debts becomes his duty
automatically.
2. Credit Investigation and Undertaking of Credit Risk
Sales ledger management function is a very important one in
factoring. Once the factoring relationship is established, it becomes the
factors responsibility to take care of all the functions relating to the
maintenance of sales ledger. The factor has to credit the customers
account whenever payment is received, send monthly statements to the
customers and to maintain haison with the client and the customer to
resolve all possible disputes. He has to inform the client about the
balances in the account, the overdue period, the financial standing of the
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customers, etc. Thus, the factor takes up the work of monthly sales
analysis and credit analysis.
3. Credit Investigation and Undertaking of Credit Risk
The factor has to monitor the financial position of the customer
carefully, since he assumes the risk of default in payment by customers
due to their financial inability to pay. This assumption of credit risk is one
of the most important functions which the factors accept. Hence, before
accepting the risk, he must be fully aware of the financial viability of the
customer, his past financial performance record, his future ability, his
honesty and integrity in the business world etc. For this purpose, the
factor also undertakes credit investigation work.
4. Provision of Finance
After the finalization of the agreement and sale of goods by the client,
the factor provides 80% of the credit sales as prepayment to the client.
Hence, the client can go ahead with his business plans or production
schedule without any interruption. This payment is generally made
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without any resource to the client. That is, in the event of non-payment,
the factor has to bear the loss of payment.
5. Rendering Consultancy Services
Apart from the above, the factor also provides management services
to the client. He informs the client about the additional business
opportunities available, the changing business and changing business and
financial profiles of the customers, the likelihood of coming recession etc.
CHAPTER :-5 FUNCTIONALITY OF FACTORING
MODUS OPERANDI
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The factor operates by buying from the selling company their invoiced
debts. These are purchased, usually without recourse by the factor that
then will be responsible for all credit control, collection and sales
accounting work. Thus the management of the company may concentrate
on production and sales and need not concern itself with non-profitable
control and sales accounting matters.
By obtaining payment of the invoices immediately from
the factor, up to 80% of their value, without having to wait until the buyer
makes payment the companys cash flow is improved. The factor makes aservice charge that varies with interest rates in forces in the money
market.
Factoring arrangement: The seller of goods/services should
make an arrangement with the factor for its future receivables.
Further steps involved in factoring are:
1. Invoice
Company fulfills contractual agreement for the clients, whether
delivery of goods or completion of services. Invoice sent to customer as
usual.
2. Notify the factor:
A copy of the invoice is forwarded to the factor (usuallyelectronically), who will then calculate the available funds.
3. Funding:
Factor remits up to 80% of the invoice value to the merchant.
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4. Follow up with the customer for realization of payment due by factor.
5. Payments received by factor from the customer.
6. Balance payment made immediately on realization to clients factor
sends monthly statement of account to the clients (merchant).
Factoring Process
Factoring is a simple extension of your current accounts receivable
process.
1. Following your normal course of business, you sell your product
or service to a customer, and issue an invoice for the value of the goods
or service.
2. To factor the invoice, you follow the sale by sending the factor a
copy of the invoice.
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3. The factor processes the invoice, and within 24-28 hours, the
factor gives you a percentage of the invoice amount, called an advance
payment. This is the first of two payments you receive when factoring an
invoice.
4. The customer, when ready to make payment, directs payment to
the factor.
5. When payment is received, the factor withholds a small factoring
service fee, and returns the difference, or reserve back to you.
6. The reserve is the second payment you receive from the factor for
the invoice.
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CHAPTER:-6
ADVANTAGES AND DISADVANTAGES OF FACTORING
There are numerous advantages to factoring, but also some potential
drawbacks.
Advantages
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Factoring provides a large and quick boost to cashflow. This may be very
valuable for businesses that are short of working capital. A business that
is owed 500,000 may be able to get 400,000 or more in just a few days.
Other advantages:
There are many factoring companies, so prices are usually competitive
it can be a cost-effective way of outsourcing your sales ledger while
freeing up your time to manage the business
it assists smoother cash flow and financial planning
some customers may respect factors and pay more quickly
factors may give you useful information about the credit standing of your
customers and they can help you to negotiate better terms with your
suppliers
factors can prove an excellent strategic - as well as financial - resource
when planning business growth
you will be protected from bad debts if you choose non-recourse
factoring - see the page in this guide on recourse factoring and non-
recourse factoring
cash is released as soon as orders are invoiced and is available for capital
investment and funding of your next orders
factors will credit check your customers and can help your business trade
with better quality customers and improved debtor spread.
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Disadvantages
Queries and disputes may have to be referred on and may have a negative
impact on your available funding. For this reason, factoring works best
when a business is efficient and there are few disputes and queries.
Other disadvantages:
The cost will mean a reduction in your profit margin on each order or
service fulfillment.
It may reduce the scope for other borrowing - book debts will not be
available as security.
Factors will restrict funding against poor quality debtors or poor debtor
spread, so you will need to manage these funding fluctuations.
It may be difficult to end an arrangement with a factor as you will have to
pay off any money they have advanced you on invoices if the customer
has not paid them yet.
Some customers may prefer to deal directly with you.
How the factor deals with your customers will affect what your customers
think of you. Make sure you use a reputable company that will not
damage your reputation.
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You have to pay extra to remove your liability for bad debtors.
CHAPTER:-7
STUDY OF VARIOUS BANKS DOING FACTORING
FACTORING COMPANIES IN INDIA
SBI Factor and Commercial Services Pvt .Ltd
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HSBC Factoring Solution
PNB Factoring :PNB Subsidiary Company
IFCI Ltd
Small Industries Development Bank India(SIDB)
Standard Chartered Bank
The Hong Kong and Shanghi Banking Corporation Ltd
Foremost Factor Limited
Global Trade financial Limited
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Export Credit Guarantee Corporation of India Ltd
Citibank, India
FACTORING BY SIDBI
The Small Industries Development Bank of India (SIDBI) introduced its
own direct factoring services in 1997 98 to help the Small Scale Sector in
timely recovery of their sales proceeds. Factoring scheme of SIDBI is a
comprehensive package of receivables management service including
advance against invoices and other allied services such as collection of proceeds from the purchaser, administration of sales ledger etc. The
service aims to solve the small scale sector's problem of early recovery of
their sale proceeds from big purchasers, and thus ensuring them of
adequate liquidity at all times. The salient features of SIDBI's scheme for
Domestic Factoring are as below:
Purpose: To provide factoring services to the manufacturers in SSI
sector supplying their produce on credit terms to various purchasers in the
domestic market with a view to assisting them in their receivable
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management as also providing them with finance against the receivables
factored.
Eligible Borrowers: Facilities are extended to existing units in SSI
sector with good track record of performance and sound financial
position supplying components/parts/accessories/sub assemblies etc. on
short term credit to well established purchaser units. They should have
been in operation for at least three years and have earned profits and/or
declared dividend during the two years prior to taking up the scheme.
Norms: Sales of the unit should preferably be spread over a minimum
of 5 customers with maximum sales concentration in a single buyer being
less than 30%. Maximum credit period shall be of 90 days.
SAs observed by SIDBI, the factoring products will in no way overlap its
present services. Thus, while the services under existing Bill Discounting
Scheme of the Bank cover the supplies made by SSI unit against the Bills
of Exchange, factoring would cover open account sales as well.
FACTORING BY ECGC
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The Reserve Bank has approved the Scheme evolved by the Export
Credit Guarantee Corporation of India Ltd., for providing a non-fund
based export factoring service to the exporters who are ECGC policy
holders. Under the scheme the ECGC will undertake non-fund based
export factoring as an in-house service. It will grant by an endorsement to
the policy, 100 per cent credit protection for bills drawn on approved
overseas buyers. The ECGC will, however, confine only to export
factoring and will not undertake domestic factoring.
The maturity factoring scheme as designed by ECGC has certain unique
features and may not exactly fit into the conventional mould of maturity
factoring. The changes devised are intended to give the clients benefits of
full factoring services through a maturity factoring scheme, thus
effectively addressing the needs of exporters to get pre-finance (advance)
on the receivables for their working capital requirements. One of the
major deviations in this regard is the very important role and the special
benefits envisaged for banks under the scheme.
The ECGC will conclude a tripartite agreement with the exporter and his
authorised dealer to the effect that:
a) In the event of non-payment in any factored bill, the ECGC would
unconditionally pay the authorised dealer the value of the bill
immediately after the expiry of 30 days from the due date of the bill on
the bank's advice of non-payment.
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b) In consideration of the above unconditional guarantee, the authorised
dealer will discount the bills without recourse to the exporter except as
indicated at (d) below.
c) The exporter will authorise the authorised dealer to deduct the
ECGCs factoring charges (which should be 1 per cent to 1.5 per cent)
from the proceeds of each bill and remit it to the ECGC.
d) If non-payment of the bill is due to the fault of the exporter, the
authorised dealer will still be paid by the ECGC as per the guarantee
contained in the tripartite agreement, but the ECGC would have recourse
to the exporter,
e ) The exporter, as also this bank, will be associated with the efforts to
recover the debt from the foreign buyer and all necessary expenses will
be borne by the ECGC.
f) Till such time the payment is made by the overseas buyer or the
ECGC, the interest payment on post shipment credit would be as per the
Reserve Bank's directives issued from time to time.
g) In the event of failure of the exporter to realise the export proceeds in
the stipulated time the ECGC will obtain direction from the Reserve Bank
in their turnover entitling them to recover the amount from the foreign
party.
ECGC would facilitate easier availability of bank finance to its factoring
clients by rendering such advances to be an attractive proposition to
banks. The Factoring Agreement that would be concluded by ECGC with
its clients has an in built provision incorporating an on-demand guarantee
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in favour of the bank without any payment or compliance or other
requirements to be satisfied by the bank.
USE OF FACTORING
In the current market situation, as competition tightens, sellers of goods
and services strive to offer more favorable terms to their buyers, and are
sometimes even forced to accept unfavorable terms imposed by buyers.
In such scenarios, sellers often agree to deferred payment terms, which
leads to, among other problems, a reduction in turnover capital. However,
the ability and willingness to grant deferrals may enable the seller to
secure significant competitive advantages. As a result, the seller can be
effectively forced to finance the buyers business, becoming dependant
on the buyers paying capacity and payment discipline.
Factoring allows sellers to replenish turnover capital immediately after
the delivery of goods, even if it agreed to deferred payment, and thus
minimize its risks.
With the use of factoring sellers can receive payment of up to 95% of the
value of the delivered goods immediately after shipment. The bank pays
this money to the seller and subsequently receives payment from the
buyer.
There is no need to re-sign agreements with the buyer. Buyers will be
notified of the change of settlement.
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PRICING OF VARIOUS SERVICES
1. The pricing of various services by factors will depend on various
aspects such as credit worthiness of the customer, his track record, quality
of portfolio, turnover, average size of invoices etc. However, the base
level would depend on the various costs to be borne by the factoring
organisation, the most important element being cost of funds.
2. The price for the financial services was suggested to be around
16% p.a. and aggregate price for all other services might not exceed 2.5%
to 3% of the debts serviced.
ORGANISATIONAL SET UP
Banks having considerable experience in financing and collections of
receivables should be associated with Factoring Services. These services
may be undertaken by banks by floating subsidiaries and initially such
organisations may be floated on zonal basis.
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LINKAGE BETWEEN BANKS AND FACTORS
It is envisaged that the suppliers will be able to obtain financial services
both from banks and factoring organisations, it is therefore, necessary to
provide for proper linkages between banks and factors. There should be
arrangements where under banks and factors furnish to each other
information relating to parties which approach more than one agency. It is
also envisaged that there could be a three party tie up, the debt being
assigned to factors by suppliers and former borrowing from banks.
Alternatively, the supplier would borrow from bank(s) and avail of debtprotection, collection and sale ledger management services from a factor.
Besides, there are other areas also in which banks and factors should
collaborate for better working capital management, in view of specialised
knowledge, skills and contacts of the factors. Legal framework
(i) Indian law does not at present, comprehensively deal with variousaspects involved in factoring business. As such, it should be necessary to
promote special legislation to support the establishment and operations of
efficient and viable factoring organisations.
(ii) To enable a Factor to be in a position to collect the debts in its
own right, it must take in assignment of book debts of clients. Existing
provision of section 13 of the Transfer of Property Act, 1882 are quite
inadequate to protect the interests of the Factor.
(iii) To make factoring economically viable, it is essential that the
assignment of book debts in favour of Factor is exempted from stamp
duty. Various states should, therefore, be requested to remit the stamp
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duty. If however, complete remission of stamp duty is not acceptable,
assignments up to specified amount or sales from specific sectors may be
exempted from such duty.
(iv) The Civil Procedure Code may be amended to clarify that the
factored debts can be recovered by resort to summary procedure under
Order 37 of the Code in terms of which defendant is not entitled, as of
right, to defend the suit, which he can do in ordinary suits.
CHAPTER NO: - 8 CASE STUDY
Case Study #1
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Are You Offering Interest-Free Financing to Your Customers?
Businesses lose money this way every day. We encounter this situation
daily and in each case the owners are surprised to find out how much
money they are losing this way. As an example, let's take Web2000
Consulting, an Internet consulting firm that owns an average of $500,000
in receivables at any given time. Web2000's A/R aging report shows that
almost all of their clients pay in 30 to 45 days, with many more waiting
with payments until day 60. The company is financially secure, but
constantly works on between $100,000 and $200,000 in various projects.
They have little cash to none immediate funds available at any given time
and are unable to buy equipment, inventory or to hire additional staff to
increase their project "turn" ratio.
Now, think about the lost income based on the "interest-free financing"
that Web2000 unknowingly grants its clients: 12% annual interest on$500,000 for 30 days would be $5000. ($500,000 in accounts receivable x
12% annual interest = $60,000 /12 months = $5,000 monthly interest
lost.)
Surprised? Take it over 1 year ($5,000 x 12) and you are looking at
$60,000 in interest that never gets billed, and never is received. Then
consider the cost of lost business on top of that. It's been proven that
contracts or purchase orders not immediately filled or completed are lost
at a rate of 20-25%. Often the client simply decides not to wait and go
with another company. (Don't forget, a purchase order is not a guarantee
or final commitment.) The company is losing 25% of $150,000 in orders
every 30 days!
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That is $30,000 a month annually, resulting in $360,000 a year. Also, if
those cancelled orders were produced during that same period, the
income on those orders, after considering the cost of inventory and labor,
would have directly affected the bottom line. This is "opportunity
revenue", lost only because the business is forced into granting no-
interest loans for 30, 45 or even 60 days or more to many of its clients.
This, as unfortunate as it is to business owners, is the way of business in
America today. Bill-paying cycles (how fast businesses pay their
payables) has been waning constantly throughout the last 15 years, and
shows no turnaround from this unfortunate trend.
Many companies are known to stretch out payments for 30, 60 or even 90
days on all bills, with the exact goal of calculating expenses and
maximizing proceeds. There is no uncertainty that it works for them, but
their cost-saving approach is your loss if it's your company expecting that
payment.
Case Study #2
They Always Pay-But It Takes 45 Days!
To further demonstrate this position, let me tell you about a business in
the construction utilities business. The proprietor (let's call him Carl) did
a lot of work for the county. Carl's company would put in the playground
equipment, parking lot and park fixtures, athletic field equipment, etc.
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Carl's problem was that he'd do the work and bill the county, but have to
wait about 45 days to be paid. The county was an excellent customer;
helpful on location, worked well with his staff, and overall it was a good
affiliation, except: THE COUNTY TOOK 45 DAYS TO PAY!!!
Carl was okay with this in the beginning, but it soon was clear that he
would need extra financing or he'd have to close shop. You as a fellow
business owner understand, he needed to have funds available to make
payroll each week. Even changing his routine to paying bi-weekly didn't
help. Furthermore, he also is required to stock a number of rather costly
inventory items, not to forget the whole operating cost related to his line
of work.
His initial decision was an easy one: he requested the county to pay him
sooner. Carl did not expect a response like this: "After they were done
smiling, they told him that it was not their decision to make, and that it
was the counties system causing the delay in payment.
Carl also knew that he wasn't qualified for conventional financing (his
business was less than 2 years old), but he was clever enough to notice,
after having spoken to a professional factoring broker, that invoice
funding was the solution he was hoping & waiting for.
The outcome of the above story is that factoring saved Carl's company.
The business has now successfully grown older which now made him
eligible for conventional bank financing.
Case Study #3
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Pass Your Factoring Costs On To You Vendors
Think about a manufacturer of parts used on heavy construction
machinery. To manufacture, this business needs a lot of essential raw
materials: electronic parts, metal & aluminum, screws, nuts & bolts, etc.
At present they have 30-day payment terms with most of their vendors,
but rarely, do they have the funds available to take advantage of the 2%
discount offered to them for swift payment (2% discount within 10 days,
net 20).
Newly exposed to factoring, this manufacturer used the money to pay
vendors/suppliers in 10 days, saving approximately 50% in factoring fees.
Even more exciting, businesses in this situation would be well advised
calling the credit managers of their vendors, negotiating immediate
payment on delivery for even deeper discounts. If the suppliers need
funds rather sooner than later (and most of them do!), then the mark downfor COD terms can be as much as 4 or 5%, which could totally
counterbalance the whole fee of factoring.
When our manufacturer realized the ability to make up for the cost of
factoring combined with the boost in fabrication, enabled by purchasing
more inventory, the proceeds realized from this added business
immediately added to the bottom line.
While there are many rewards to factoring, many businesses are drawn to
it above all for the reason that factoring can represent an end to the
troubles of bad debts. As part of the procedure, factors will check the
credit of your customers, reducing your fixed cost for credit management.
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Invoices of those clients considered to be of good credit are often sold on
a "non-recourse" basis. This simply means: the factor buys the invoice
from the company owning the account receivable. If the client required to
pay the invoice, is financially unable to pay, the factor cannot ask you to
return the advance. But, should there be an issue with the product or
service provided, you may return the advance, or substitute for another
invoice of equal value.
Most likely, though, this invoice will never have been funded due to the
factor "checking" the invoice prior to funding. This means that the factor
will be ensuring that your customer is satisfied with the product or
services delivered, almost guaranteeing the intent to pay, requesting that
the payment will be sent to the factor directly.
While this part of the procedure is necessary to guard the factor from
purchasing false invoices, it is also helpful to the client. If the factor
learns that your buyer is not pleased, for whatever reason (wrong size,
wrong model, etc.), the factor will instantly pass on this information on to
you, enabling you to fix the issue. It operates as an "early warning
system" that avoids problems caused by wrong shipments, delaying
compensation and hurting the client-customer liaison.
CONCLUSION
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In this unit we have discussed the financial service like factoring.
Factoring involve financing and collection of accounts receivable in
domestic as well as international trade. This service is rendered by the
factor that provides finance against book debts, collects cash against
receivables, undertakes sales ledger administration, provides protection
against bad debts, etc. There are three parties to a factoring contract:
buyer of goods, who has to pay for goods bought on credit terms, seller of
goods, who has to realize credit sales from buyer. And the factor, who
acts as an agent and realize the sales from the buyer.
Factoring is a continuity arrangement between a financial institution (the
factor) and a business concern (the client) selling goods or services to
trade customer (the customer) where the factor purchase the clients
accounts receivable/ book debts either with or without recourse to the
client and in relation there to controls the credit extended to the customer
and administer the sales ledger.
QUESTIONNAIRES
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Q. 1. Is there any other services provider in invoice factoring if yes state
example.
Q.2 .what is factoring according to you?
Q.3. How does factoring help?
a) Improves cash flow
b) Provides debt collection sources
c) Assists in credit assessment / management
Q.4. offers competitive credit terms to customer
Q.5. Are these elements essential in factoring
a) Instant cash flow
b) Saves management time
Q.6.What is benefits and drawbacks of factoring?
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BIBLIOGRAPHY AND WEBLIOGRAPHY
Bibliography:-
Financial service management:- Dipak abhyankar
www.google.com
www.n.wikipedia.com