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Factoring & Bills Discounting
Factoring & Bills Discounting
&
BILLS
DISCOUNTING
FACTORING
1. FACTORING IS A POPULAR
MECHANISM OF MANAGING,
FINANCING AND COLLECTING
RECIEVABLES.
2. IT IS A METHOD OF CONVERTING A
NON PRODUCTIVE, INACTIVE ASSET
INTO A PRODUCTIVE ASSET BY
SELLING RECIEVABLES TO A COMPANY
THAT SPECIALISES IN THEIR
FACTORING SERVICES
1. CREDIT ADMINISTRATION
3. FINANCIAL ASSISTANCE
FACTORING & SHORT TERM
FINANCING
ALTHOUGH FACTORING PROVIDES SHORT TERM FINANCIAL
ACCOMADATION TO THE CLIENT, IT DIFFERS FROM OTHER TYPES
OF SHORT-TERM CREDIT IN THE FOLLOWING MANNER:
LIMITATIONS:
3. BULK/AGENCY FACTORING
COSTS & BENEFITS OF
FACTORING
TYPES OF COSTS INVOLVED:
1. FACTORING COMMISION OR SERVICE FEE,
2. INTREST ON ADVANCE GRANTED BY THE FACTOR TO
THE FIRM
BENEFITS OF FACTORING:
1. FACTORING PROVIDES SPECIALISED SERVICES IN
CREDIT MANAGEMENT,
2. FACTORING HELPS THE FIRM TO SAVE COSTOF
CREDIT ADMINISTRATION.
QUESTION:
A SMALL FIRM HAS A TOTAL CREDIT SALES OF
Rs. 80 LAKHS & ITS AVG. COLLECTION PERIOD IS
80 DAYS. THE PAST EXPERIENCE INDICATES
THAT BAD-DEBTS LOSSES ARE AROUND 1% OF
CREDIT SALES. THE FIRM SPENDS ABOUT Rs.
1,20,000 P.A. ON ADMINISTERING ITS CREDIT
SALES. THIS COST INCLUDES SALARIES OF ONE
OFFICER, & TWO CLERKS WHO HANDLE CREDIT
CHECKING, CLLECTION, ETC. THESE ARE
AVOIDABLE COST. A FACTOR IS PREPARED TO
BUY A FIRM’S RECIVABLES. HE WILL CHARGE 2%
COMMISION. HE WILL ALSO PAY ADVANCE
AGAINST RECIEVABLES OF THE FIRM @ OF 18%
INTREST AFTER WITHOLDING 10% AS RESERVE.
WHAT SHOULD THE FIRM DO?
1ST CALCULATE AVG LEVEL OF RECIEVABLES
AVG LEVEL OF RECIEVABLES =80,00,000/360 X 80 = Rs. 17,77,778
HOWEVER, THE FACTOR WILL DEDUCT 18% INT BEFORE PAYING THE ADVANCE FOR 80 DAYS.
EFFECTIVE RATE OF ANNUAL COST = Rs. 2,41,603/ Rs. 15,01,866 = .016 OR 16%
THE ANNUAL % COST OF 16% OF FACTORING RECIEVABLES CAN BE COMPARED WITH THE COST OF
OTHER POSSIBLE SOURCES OF SHORT TERM FINANCING
THE ADVANCE WHICH THE FACTOR WILL PAY WILL BE THE AVG.
LEVEL OF RECIEVABLES – FACTORING COMMISION – INTREST ON
ADVANCE. THE FACTORING COMMISION IS 2% OF AVERAGE
RECIEVABLES (80 DAYS)