Professional Documents
Culture Documents
GROUP: III
FACTORING
Factoring is of recent origin in Indian Context.
Banking Regulation Act, 1949, was amended in 1991 for Banks setting
up factoring services.
PROCESS OF FACTORING
CLIENT CUSTOMER
FACTOR
So, a Factor is,
a) A Financial Intermediary
b) That buys invoices of a manufacturer or a trader, at a discount,
and
c) Takes responsibility for collection of payments.
Client sells the customer’s account to the Factor and notifies the customer.
Factor makes the final payment to the Client when the account is collected
or on the guaranteed payment date.
MECHANICS OF FACTORING
The Client (Seller) sells goods to the buyer and prepares invoice with a
notation that debt due on account of this invoice is assigned to and must be
paid to the Factor (Financial Intermediary).
The Client (Seller) submits invoice copy only with Delivery Challan showing
receipt of goods by buyer, to the Factor.
The Factor, after scrutiny of these papers, allows payment (,usually upto 80%
of invoice value). The balance is retained as Retention Money (Margin Money).
This is also called Factor Reserve.
The drawing limit is adjusted on a continuous basis after taking into account
the collection of Factored Debts.
Once the invoice is honoured by the buyer on due date, the Retention Money
credited to the Client’s Account.
Till the payment of bills, the Factor follows up the payment and sends regular
statements to the Client.
CHARGES FOR FACTORING
SERVICES
Factor charges Commission (as a flat percentage of value of Debts
purchased) (0.50% to 1.50%)
Non-recourse Factoring
Maturity Factoring
Cross-border Factoring
RECOURSE FACTORING
No risk to Factor.
CROSS - BORDER FACTORING
It is similar to domestic factoring except that there are four parties, viz.,
a) Exporter,
b) Export Factor,
c) Import Factor, and
d) Importer.
3. Notice of assignment is
3. No notice of assignment provided to customers of the
provided to customers of the Client.
Client.
FACTORING
vs
BILLS DISCOUNTING (contd…)
Problems in recovery.