OPERATING GUIDELINES FOR DOMESTIC FACTORING
FOR USE OF PRACTITIONERSPREPARED FOR CONSULTATIVE COMMITTEEOF BANGLADESH BANKPREPARED BYSOMNATH ROY, CONSULTANTPRASANTA K. BANERJEE, CONSULTANT
SOUTH ASIA ENTERPRISE DEVELOPMENT FACILITY (SEDF)
Terminologies
A
Factor
means the financing body which will offer factoring to its client.A
Client
means seller or supplier of goods/services on credit.A
Debtor
means the buyer who buys goods/services on credit.
Accounts Receivable/Book Debt
means the trade debt arising from sale of goods/services by seller to buyer on credit.
Open Account Trade
means an arrangement in which the goods/services aresold /supplied by seller to buyer on credit without raising any bill of exchange or letter of credit.
Prepayment
means advance payment made by the factor to the client (seller) upto certain percentage of the invoice value (generally it varies from 75 to 85% of invoice value).
Retention
means margin maintained by the factor (invoice value minusprepayment). The margin is kept to a) recover discounting & factoring chargesand b) maintain a cushion for any short payment by buyer on commercial groundand/or recovery of any overdues in respect of other invoices. The retentionamount generally varies from 15 to 25%. After deducting its dues from the marginthe balance amount is refunded to the client (seller).
Purchase Order
means a document or form used by a buyer to issue order for goods/services.
Invoice
means a legal debt instrument which indicates the amount due from abuyer to pay for delivered goods/services.
Dilution
means
if the payment received from the debtor against an invoice isless than the value of the invoice for any of the following reasons:i) Discount agreed/levied by buyer for non compliance of trade terms by seller ii) Rejection of goods/servicesii) Adjustment on account of two way trades
Non Recourse
means a type of factoring where the factor assumes completeresponsibility for collection of debt. If the debt is not collected due to the financialinability of the buyer (and not arising out of trade dispute), the factor assumes theloss or recovers from credit insurer. Non recourse factoring can be offered whencredit insurance market is developed.
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Recourse
means the right of the factor to recover its dues from the seller (client)in case the buyer does not pay to factor due to trade dispute or its financialinability.
Undisclosed factoring
means where a factor discounts the invoice of a seller without the knowledge of the buyer
.Discount Rate
: the percentage rate of interest the factor charges on the pre-payment amount. The discount rate should be based on cost of funds on onehand and prevailing lending rate for competitive products (overdraft, etc) chargedby commercial banks/financial institutions on the other.
Factoring Charge
: a price charged by the factor to the seller for providingservices for maintenance of sales ledger and collection of payment from thebuyer.The factoring charge is generally 0.1% to 0.5% of the value of invoice factored.
Facility Set up Fee
: this is a one time upfront fee charged by factor to seller toset up the facility (processing charge for covering cost of outsourcing of audit, etcand cost of maintaining liquidity for initial prepayment).This fee is
optional
and isnegotiable between factor and seller.
Face Value
means the total value of an invoice.
Performance Risks
means risks associated with compliances of terms andconditions of a trade agreed between the buyer and the seller, such as,Specifications / Performance standards of products/services, delivery period,guarantees & warranties, etc.
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