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Factoring Main Content

Factoring Main Content

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Published by Mahek Chheda
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Published by: Mahek Chheda on Sep 25, 2012
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FACTORING SERVICES IN INDIA WITH RESSPECT TO HSBC BANK
 
1
CHAPTER: 1 INTRODUCTION OFFACTORING
 
FACTORING SERVICES IN INDIA WITH RESSPECT TO HSBC BANK
 
2
1.
 
OVERVIEW OF FACTORING:
With the advent of globalization and liberalization, competition among firms-both domesticand international has increased. Globally, mergers and acquisitions are a commonphenomenon. Indian corporates have to guard hostile takeovers. Both environmental and
technological changes are rapid and a firm‟s strategy has to constantly keep pace with these
changes. Financial market all over the world is facing rough weather. In the scenario,management of cash and receivables is of utmost importance to both giants and small firms.Much business has collapsed for want of liquidity. The key to success lies in convertingcredit sales into cash within a short period of time. There are many traditional methods suchas cash credit, bills discounting and consumer credit through financial intermediaries thathelp in raising short term funds against credit sales or receivables. Recently, new financialservices such as factoring and forfaiting have come into existence to assist the financing of credit sales and, thereby, help the business unit to tide over the liquidity crunch.
1.1
 
MEANING /DEFINATION OF FACTORING:
The word „Factor‟ has been derived from the Latin word “Facere” which means „to mak 
e or
to do‟. In other words, it means to get things done. According to the Webster Dictionary„Factor‟ is an agent, as a banking or insurance company, engaged in financing the operations
of certain companies or in financing through purchase of account receivables.Definition:1.
 
Robert W. Johnson in his book „Financial Management‟ states, “ factoring is a service
involving the purchase by a financial organization, called a factor, of receivablesowned to manufacturers and distributors by their customers, with the factor assuming
full credit and collection responsibilities”.
 2.
 
According to V.A.Avadhani, “factoring is a service of financial nature involving theconversion of credit bills into cash”.
 3.
 
In the words of Kohok, “factoring is an asset based means of fina
ncing by which thefactor buys up the book debts of a company on a regular basis, paying cash downagainst receivables, and then collects the amounts from the customers to whom
company has to supply goods”.
 
 
FACTORING SERVICES IN INDIA WITH RESSPECT TO HSBC BANK
 
3
1.2. PROCESS OF FACTORING:
Factoring is a financial option for the management of receivables. In simple definition it isthe conversion of credit sales into cash. In factoring, financial institution (factor) buys theaccounts receivable of a company (client) and pays up to 80% (rarely up to 90%) of theamount immediately on agreement. Factoring company pays the remaining amount (balance20% finance cost operating cost) to the client when the customer pays to the debt. Collectionof debt from the customer is done either by the factor or the client depending upon the type of factoring. Pays to the debt. Collection of debt from the customer is done either by the factoror the client depending upon the type of factoring. Example are factoring against goodspurchased, factoring for construction services (usually for government contracts where thegovernment body is capable of paying back the debt in the stipulated period of factoring.Contractors submit invoices to get cash instantly), factoring against medical insurance etc.Let us see how factoring is done against invoices of good purchased.Figure 1.2: Flow Chart of factoringBesides purchase of accounts receivables, a factor may provide a wide range of services, such as

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