WHAT IS FACTORING?

 Factoring also known as Accounts Receivable Financing. it is the practice of selling your
accounts receivable (invoices) at a discount to another company. You get the money from the
company that you sold your accounts receivable to and they become responsible for collecting
on the invoices.

 It is a collection and finance service designed to improve your cash flow, turning your credit
sales invoices into ready cash

 unlike any other financing services it normally requires no collateral

 It can take time to collect an invoice, so when a company finances its accounts receivable, they
are getting their money faster and without the hassle of the collection process.

 As in businesses, it is important to free up working capital so that the money can be invested
into new equipment, used to pay bills, or used toward payroll.

PARTIES INVOLVED IN FACTORING

 Client: - A client is a business concern selling goods or providing services.

 Factor: - Factor is a financial institution.

 Customer's:- Customer is/are the one’s to whom the goods and /or services are sold

Functions Performed by the Factor

 Financing facility/Trade debts

 Collection facility of accounts receivable

 Maintenance/administration of sales ledger

 Advisory Services

 Credit control and credit restriction

Types of Factoring

 Recourse factoring

 Non recourse factoring

 Advance Factoring

 Non-notification Factoring

 Bulk/Agency Factoring
  Maturity Factoring

COSTS ASSOCIATED WITH FACTORING

 Service/Handling charge - It covers the cost of services viz. collection, sales ledger management
etc. It ranges from 0.1% to 0.2% on the total value of invoices factored/ collected.

 Finance Charge - It is computed on the pre-payment outstanding in the client’s account at

monthly intervals. Factoring can be cheap source of funds, provided clients organize their
drawals from bank.

WORKING MECHANISM OF FACTORING

International Factoring

Parties involved in International factoring:

Client, Customer, Import Factor, Export Factor

MECHANISM OF INTERNATIONAL/ EXPORT FACTORING:

 The Exporter signs a factoring agreement with the export factor. The factor then becomes
responsible for all aspects of the factoring operations.

 The export factor enters into an agreement with a correspondent to serve as an import factor in
the country where goods are to be sold.
 The import factor investigates the credit standing of the buyer and establishes lines of credit.
This allows the buyer to place an order on open account terms without opening letters of credit.
The receivables are assigned to the import factor.

 The export factor will now advance up to 80 to 90 % of the invoice value to the exporter.

 On the due date the import factor collects the full invoice value and is responsible for the swift
transmission of funds to export factor that then pays the exporter the outstanding balance.  

BENEFITS OF FACTORING

Benefits for Client

 The client gets ready cash even from your credit sales.

 Client have substantial funds-up to 80% of the factored invoices, which is much more than bank
finance against credit sales.

 Client is able to offer competitive terms to your buyers and improve your sales and ultimately
profit.

 As cash is available for credit sales, client’s liquidity will improve and therefore, client
production cycle will be accelerated.

 Appraisal and documentation procedures are made simple and response time is very small.

 Cash disbursals are instantaneous.

 Factoring provides you much more than bill discounting, like finance, collection, sales ledger
administration, etc.

 You do not have to submit any periodical statements. On the contrary, factor provides the client
with classified periodical statement of outstanding invoices.

 Factoring replaces high cost market credit and enables purchases on cash basis availing cash
discounts.

 Each invoice is followed up for payment.

 Faster collection and lowest response time.

Benefits for Customers

• Customers get adequate credit period for payment of assigned debts.

• Factoring will facilitate their credit purchases.

• Customers save on high bank charges and expenses.

• No Documentation except acknowledgement of the Notification letter, provided customers
undertake to make payment of the invoices to the factor.

• Factors furnish the customers with periodical statement of outstanding invoices factored on
them.

• Factoring does not impinge on customers’ rights vis-à-vis the supplier in respect of quality of
goods, contractual obligations, etc.

Benefits for Factor

• Factoring is not a threat to banking; it is a financial service complementary to that of the banks.

• Factoring improves liquidity of your borrowers.

• Credit sales are closely monitored by the Factor and proceeds are routed through the client’s
accounts with the bank.

• Factoring improves the quality of advances of banks.

FACTORING IS DIFFERENT FROM BILL DISCOUNTING

Factoring

 In factoring, total services are provided.

 In this, trade debt is purchased by assignment.

 In this, purchase of debt is for consideration.

 Factoring is done on whole turnover.

 In this, an all time acceptance of notification is sufficient for all future transaction

BILL DISCOUNTING

 In bill discounting, only finance is provided.

 In this, advance is made against bills.

 In this, security is provided.

 Bill discounting is done on individual transaction.

In this the bill has to be accepted by drawee

 FACTORING VS BANK FINANCE

 A loan places a debt on your business balance sheet, which costs you interest. By contrast,
factoring puts money in the bank without the creation of any obligation. Frequently, the
factoring discount will be less than the current loan interest rate.

 Loans are largely dependent on the borrower's financial soundness, whereas factoring is more
interested in the soundness of the client's customers and not the client's business itself.

 While only receivables are funded by Factors, Banks offer package of financial services viz.
Working Capital, Term Loan, DPG, L/Cs, Bank Guarantee, etc.

FACTORING COMPANIES IN INDIA

SBI Factors

 Subsidiary of SBI

 1st factoring company to be set up in India

 Maximum market share in March, 2007

 Services include factoring invoices, sales ledger maintenance and collection service.

GLOBAL TRADE FINANCE LIMITED

 GTF is headquartered in Mumbai

 only provider of international factoring, domestic factoring and forfeiting services under one
roof in India

 Member of Factors Chain International

 Services provided include Finance, credit protection, collection service, Sales Ledger
management