FACTORING

Factoring Services - Concept

 Factoring services started in US in early 1920s and were
introduced to other parts in 1960s
 Factoring is an arrangement in which receivables on
account of sale of goods or services are sold to the factor
at a certain discount. As the factor gets the title to the
receivables on account of the factoring contract, factor
becomes responsible for all credit control, sales ledger
administration and debt collection from the customers
Factoring Services - Concept
Parties to factoring
 Client
 Customer
 Factor
 CLIENT
 or seller


Sends invoices to customer

Assigns invoice to Factor

Prepayment up to 80%

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Statement to customer

FACTOR Payment to Factor CUSTOMER


The following services to be
provided by the factor;
 finance,
 maintenance of accounts,
 collection of debts and
 protection against credit risk.

Atleast two of these

services is to be provided
Cost of factoring

 Service fee (for administrating the sales

ledger as well as protection against bad debts
– as a percentage of invoice value or number
of invoices)
 Discount charges (advance provided by factor
and is interest )
Types of Factoring Services
 Recourse and Non-recourse Factoring
 A brief discussion
 Advance and Maturity Factoring
 Advance paid against invoice where as in maturity
factoring payment is made against guarantee or collection
of receivables
 Full Factoring
 Disclosed and Undisclosed Factoring
 Name of the factor is disclosed in the invoice by the
supplier/client asking the customer to make payment to the
factor
Benefits enjoyed

 Trade financing
 Credit risk control and bad debt
protection
 Management of sales ledger
 Relief from collection headaches
Factoring companies in India
 Canbank Factors Limited
 Commercial Services Pvt. Ltd
 The Hongkong and Shanghai Banking Corporation Ltd
 Foremost Factors Limited
 Global Trade Finance Limited
 Export Credit Guarantee Corporation of India Ltd
 Citibank NA, India
 Small Industries Development Bank of India (SIDBI)
 Standard Chartered Bank
Line of credit
 An arrangement in which a bank or vendor
extends a specified amount of unsecured
credit to a specified borrower for a
specified time period. also called credit
line.
Methods deciding line of credit
 Objective method
Annual
sales________
average collection
period method
 Subjective

on a subjective judgement depending on

various reports and other criteria
FACTORING V/S BILLS
DISCOUNTING
 THE MAJOR DIFFERENCE BETWEEN
THE TWO IS THAT BILLS
DISOUNTING IS ALWAYS WITH
RECOURSE, WHEREAS
FACTORING MAY BE WITH OR
WITHOUT RECOURSE.
Bill Discounting Factoring
1. Individual Transaction. 1. Whole turnover basis.This also
gives the client the liberty to
draw desired finance only.
2. A one time notification is
2. Each bill has to be
taken from the customer at
individually accepted by the commencement of the
the drawee. This takes facility.
time. 3. No stamp duty is charged on
3. Stamp duty is charged on the invoices. No charges
certain usance bills other than the usual finance
together with bank and service charge.
charges. It proves very
expensive
Bill Discounting Factoring

4. More paperwork is 4. No such paperwork is

involved. involved.
5. Grace period for 5. Grace period are far
payment is usually 3 more generous.
days. 6. Only copies of such
6. Original documents are documents are
to be submitted. necessary.
7. No up front charges.
7. Charges are normally up Finance charges are
front. levied on only the
amount of money
withdrawn .
FORFEITING
Meaning
 Forfaiting is the term generally used to
denote the purchase of obligations
falling due at some future date, arising
from deliveries of goods and services-
mostly export transactions-without
recourse to any previous holder of the
obligation.
 In a forfaiting transaction, an exporter/seller remits
guaranteed debt, which results from a sale on credit, to
a forfaiting company.
 The forfaiting company pays him cash, up-front, the
face value of the debt minus a discount.
 The debt has to be enhanced through an aval or
guarantee from a bank or other financially strong
institution.
 Once the debt has been accepted by the forfaiter, the
exporter is no longer liable for a failure of the buyer to
pay-the forfaiter, except where there was element of
fraud.
Forfaiting
 Forfaiting is a form of financing of (export)
receivables pertaining to international trade. It
denotes the purchase of trade bills/promissory
notes by a bank/financial institution without
recourse to the seller. The purchase is in the form
of discounting the documents covering the entire
risk of non-payment in collection. All risks and
collection problems are fully the responsibility of
the purchaser (Forfaiter) who pays cash to seller
after discounting the bills/notes.
Forfaiting
 Summary
 Specific form of export trade finance
 Export receivables discounted – full value of export bill considered
 Debt instruments most commonly used are bills of exchange and
promissory notes
 Payment in respect of export receivables which is further evidenced
by bills of exchange/promissory notes must be guaranteed by
importers bank. Usual form of guarantee is an Aval
 Forefaiting is always without recourse
 Source of trade finance which enables exporters to get funds from
the institution called forfaiter on transferring the right to recover the
debts from the importer
Factoring Vs Forfaiting
 Forfaiter discounts the entire value – 100 % finance where as a
Factor – 75-80%
 Avalling bank provides unconditional and irrevocable guarantee
– critical factor in forfaiting – in factoring decision is based on
credit rating of the exporter (non-recourse)
 Forfaiting is pure financial arrangement – Factoring includes
ledger administration, collection, advise etc
 Factoring is short-term finance whereas forfaiting finances
notes/bills arising out of deferred credit transactions spread over
3 years
 A factor does not guard against exchange rate fluctuations,
whereas forfaiter charges a premium for such risk
THANK YOU