sonali final

8/3/2019 Sonali Final

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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

sonali final

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