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Term Paper on Factoring

Term Paper on Factoring

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Published by vashishtha gupta

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Published by: vashishtha gupta on Nov 27, 2009
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S.NoTOPICPage No.1Introduction 2-32Function Of Factoring3-43Types Of Factoring5-74Mechanism Of Factoring7-85A Study Group Of Factoring96Factoring Organization In India107Advantages Of Factoring10-128Problems In Factoring12-139Conclusion1410Bibliography15INTRODUCTION OF FACTORING:-
Dr. S. PANDIYAPage 1
Factoring is a financial option for the management of receivables. In simple definition it is theconversion of credit sales into cash. In factoring, a financial institution (factor) buys the accountsreceivable of a company (Client) and pays up to 80%(rarely up to 90%) of the amountimmediately on agreement. Factoring company pays the remaining amount (Balance 20%-finance cost-operating cost) to the client when the customer pays the debt. Collection of debtfrom the customer is done either by the factor or the client depending upon the type of factoring.We will see different types of factoring in this article. The account receivable in factoring caneither be for a product or service. Examples are factoring against goods purchased, factoring for construction services (usually for government contracts where the government body is capable of  paying back the debt in the stipulated period of factoring. Contractors submit invoices to getcash instantly), factoring against medical insurance etc. Let us see how factoring is done againstan invoice of goods purchased.1.Usually the period for factoring is 90 to 150 days. Some factoring companies allow evenmore than 150 days.2.Factoring is considered to be a costly source of finance compared to other sources of short term borrowings.3.Factoring receivables is an ideal financial solution for new and emerging firms withoutstrong financials. This is because credit worthiness is evaluated based on the financialstrength of the customer (debtor). Hence these companies can leverage on the financialstrength of their customers.4.Bad debts will not be considered for factoring.5.Credit rating is not mandatory. But the factoring companies usually carry out credit risk analysis before entering into the agreement.6.Factoring is a method of off balance sheet financing.
Dr. S. PANDIYAPage 2
7.Cost of factoring=finance cost + operating cost. Factoring cost vary according to thetransaction size, financial strength of the customer etc. The cost of factoring vary from1.5% to 3% per month depending upon the financial strength of the client's customer.8.Indian firms offer factoring for invoices as low as 1000Rs9.For delayed payments beyond the approved credit period, penal charge of around 1-2% per month over and above the normal cost is charged (it varies like 1% for the first monthand 2% afterwards).
A factor maintains sales Ledger for his client firm. An invoice is sent by the client to thecustomer, a copy of which is marked to the factor. The client need not maintain individual salesledgers for his customers. On the basis of the sales ledger, the factor reports to te client about thecurrent status of his receivables, as also receipt of payments from the customers and as part of a package, may generate other useful information. With the help of these reports, the client firmcan review its credit and collection policies more effectively.
Under factoring arrangements factoring institution undertakes the responsibility of collecting thereceivables for its client. Thus, the client firm is relieved of the regours of collecting debts andthereby is enable to concentrate on improving the purchase, production, marketing and other managerial aspects of the business. With the help of trained manpower backed by infrastructuralfacilities factoring agency systematically undertakes follow up measure and makes timelydemand in the debtors to pay the amounts.
Credit control and credit protection
Dr. S. PANDIYAPage 3

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