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FACTORING

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Recievebles are constitute important role in portionofcurrent asset.

There are two problems

Raising of fund to financial receivebles Collection and defaults

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FACTORING

Factoring is of recent origin in Indian Context.

Kalyana Sundaram Committee recommended introduction of factoringin 1989.

Banking Regulation Act, 1949, was amended in 1991 for Banks settingup factoring services.

SBI/Canara Bank have set up their Factoring Subsidiaries:- SBI Factors Ltd., (April, 1991)

CanBank Factors Ltd., (August, 1991).

RBI has permitted Banks to undertake factoring services throughsubsidiaries.

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Meaning..

Factoring is a financial transaction whereby abusiness sells its accountsreceivable (i.e., invoices) to a third party (called

a factor) at a discount. One of the oldest forms of business financing,

factoring is the cash-management tool of choicefor many companies. Factoring is very common in

certain industries, such as the clothing industry,where long receivables are part of the businesscycle.

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WHAT IS FACTORING ?

Factoring is the Sale of Book Debts by a firm (Client) to a financial institution

(Factor) on the understanding that the Factor will pay for the Book Debts as

and when they are collected or on a guaranteed payment date. Normally, the

Factor makes a part payment (usually upto 80%) immediately after the debts

are purchased thereby providing immediate liquidity to the Client.

PROCESS OF FACTORING

CLIENT CUSTOMER

FACTOR

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So, a Factor is,

a) A Financial Intermediaryb) That buys invoices of a manufacturer or a trader, at a discount,

and

c) Takes responsibility for collection of payments.

The parties involved in the factoring transaction are:-

a) Supplier or Seller (Client)b) Buyer or Debtor (Customer)c) Financial Intermediary (Factor)

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features

Factoring is a service of financial nature.itinvolves the conversion of credit bills into cash.acrece and other credit dues resulting from credit

sales appear in the books of accounts The factor purchases the credit/receivables and

collects them on the due date. Risk associatedwith cr are assumed by factor

A factor is a financial institution. It may be a co mmercial bank or financial company.it offers

services relating to management and financing ofdebt.it act as intermediary.

l

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A factor specializes in handling and collectingreceivables in an efficient manner.

Factoring is a techniques of receivables

management. it is used to release fund tied up inreceivables and solve the problems relating tocollection, delay and defaults of receivables.

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Functions

Provisions of finance-receivebles or book debt isthe subject matter of factoring.a factor buys thebook debts of his cient. 80% of the value of

receivebles as advances to the client. Administration of sales ledger-factor maintain

the clients sales ledger. When credit sales takeplace , the firm prepare two copies of invoice.

Entries are made in the ledger under open itemmethod

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Collection of receivables.-the main function offactor is to cllect the factors on behalf of theclient and to relieves him from all tension and

problems associated with credit collection. Protection against risk.- all risk relating to the

receivables will be assumed by the facto

Advisory services. - these services arises out of

the close relation ship between a factor and aclient . The factor has better knowledge and wideexperience in the field of finance.

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Advantages..

Improves efficiency.Fact is an important tool for efficient receivable

management.it gives specilisedservices withregard to sales ledger administrationcreditcontrol etc.

Higher credit standing

Factoring generate cash for the selling fiirm. It

can use this cash for other purposes. Withadvance payment made by factor it is possible toclined to pay off his liabilities

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Reduces cost

The client need not have special administrativesetup look after credit control, hence it saves

manpower ,time and effort

Advisory service- it is the better mangement ofrecevebles .the factor assess the financial

operationl and managerial capability of customer.

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SERVICES OFFERED BY A

FACTOR1. Follow-up and collection of Receivables from

Clients.

2. Purchase of Receivables with or withoutrecourse.

3. Help in getting information and credit line oncustomers (credit protection)

4.Sorting out disputes, if any, due to hisrelationship with Buyer & Seller.

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PROCESS INVOLVED IN FACTORING

Client concludes a credit sale with a customer.

Client sells the customers account to the Factor and notifies the customer.

Factor makes part payment (advance) against account purchased, after adjusting for

commission and interest on the advance.

Factor maintains the customers account and follows up for payment.

Customer remits the amount due to the Factor.

Factor makes the final payment to the Client when the account is collected or on theguaranteed payment date.

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MECHANICS OF FACTORING

The Client (Seller) sells goods to the buyer and prepares invoice with anotation that debt due on account of this invoice is assigned to and must bepaid to the Factor (Financial Intermediary).

The Client (Seller) submits invoice copy only with Delivery Challan showingreceipt of goods by buyer, to the Factor.

The Factor, after scrutiny of these papers, allows payment (,usually upto 80%of invoice value). The balance is retained as Retention Money (Margin Money).This is also called Factor Reserve.

The drawing limit is adjusted on a continuous basis after taking into accountthe collection of Factored Debts.

Once the invoice is honoured by the buyer on due date, the Retention Moneycredited to the Clients Account.

Till the payment of bills, the Factor follows up the payment and sends regularstatements to the Client.

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CHARGES FOR FACTORING SERVICES

Factor charges Commission (as a flat percentage of value of Debts purchased)(0.50% to 1.50%)

Commission is collected up-front.

For making immediate part payment, interest charged. Interest is higher than rateof interest charged on Working Capital Finance by Banks.

If interest is charged up-front, it is called discount.

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TYPES OF FACTORING

Recourse Factoring

Non-recourse Factoring

Maturity Factoring

Cross-border Factoring

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RECOURSE FACTORING

Upto 75% to 85% of the Invoice Receivable is factored.

Interest is charged from the date of advance to the date of collection.

Factor purchases Receivables on the condition that loss arising on account of non-recovery will be borne by the Client.

Credit Risk is with the Client.

Factor does not participate in the credit sanction process.

In India, factoring is done with recourse.

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NON-RECOURSE FACTORING

Factor purchases Receivables on the condition that the Factor has norecourse to the Client, if the debt turns out to be non-recoverable.

Credit risk is with the Factor.

Higher commission is charged.

Factor participates in credit sanction process and approves credit limitgiven by the Client to the Customer.

In USA/UK, factoring is commonly done without recourse.

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MATURITY FACTORING

Factor does not make any advance payment to the Client.

Pays on guaranteed payment date or on collection of Receivables.

Guaranteed payment date is usually fixed taking into account previous

collection experience of the Client.

Nominal Commission is charged.

No risk to Factor.

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CROSS - BORDER FACTORING

It is similar to domestic factoring except that there are four parties, viz.,a) Exporter,b) Export Factor,c) Import Factor, andd) Importer.

It is also called two-factor system of factoring. Exporter (Client) enters into factoring arrangement with Export Factor in

his country and assigns to him export receivables. Export Factor enters into arrangement with Import Factor and has

arrangement for credit evaluation & collection of payment for an agreed fee. Notation is made on the invoice that importer has to make payment to the

Import Factor. Import Factor collects payment and remits to Export Factor who passes onthe proceeds to the Exporter after adjusting his advance, if any.

Where foreign currency is involved, Factor covers exchange risk also.

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THANK YOU