FACTORING & Forefaiting DISCOUNTING

FACTORING AND FORFAITING

Factoring is of recent origin in Indian Context. Kalyana Sundaram Committee recommended introduction of factoring in 1989. Banking Regulation Act, 1949, was amended in 1991 for Banks setting up factoring services. SBI/Canara Bank have set up their Factoring Subsidiaries:SBI Factors Ltd., (April, 1991) CanBank Factors Ltd., (August, 1991). RBI has permitted Banks to undertake factoring services through subsidiaries.

Factoring
Factoring is defined as an asset-based means of financing by which the factor buys up the book debts of a company on a regular basis, paying cash down against receivables, and then collects the amounts from the customers to whom the company has supplied goods.

WHAT IS FACTORING ?
Normally, the Factor makes a part payment (usually upto 80%) immediately after the debts are purchased thereby providing immediate liquidity to the Client. PROCESS OF FACTORING

CLIENT

CUSTOMER

FACTOR

PROCESS INVOLVED IN FACTORING

Customer places an order with the client for goods and/or services on credit Client concludes a credit sale with a customer. Client Delivers the goods and invoice with a notice to pay to the factor. Client sells the customers account to the Factor and notifies the customer. Factor makes part payment (advance) against account purchased say 80-90 per cent of the invoice value on the production of a copy of invoice, after adjusting for commission and interest on the advance. Factor maintains the customers account and follows up for payment. Customer remits the amount due to the Factor. Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.

TYPES OF FACTORING SERVICES

1) Full Servicing Factoring: This is also known as without recourse factoring service. It is the most comprehensive type of factoring arrangement offering all types of services, namely:  (a) Finance,  (b) Sales ledger administration,  (c) Collection,  (d) Debt protection,  (e) Advisory services.  The most important characteristic of this type of factoring service is that it gives protection against bad debts to the client.  In other words, in case the customer fails to pay, the factor will absorb the losses arising from insolvency or bankruptcy of the clients customers.  High commission is charged 2) Recourse Factoring: Used in India In such a type of factoring arrangement, the factor provides all types of facilities except debt protection. That means, in other words, the client is responsible for any bad debts arising from insolvency of the clients customers.

Discounting of Bill
Bill financing is considered to be an appropriate form of financing trade and business. Under this form of financing, seller of the goods draw a bill of exchange on the buyer (who accepts and returns the same to the drawer). Subsequently seller of the goods discounts the bill of exchange with bank or finance company and avail the finance accordingly. Only those bills which arise out of genuine trade transactions are considered by the banks and finance companies for discounting purpose.

FACTORING vs BILLS DISCOUNTING

BILL DISCOUNTING Finance alone is provided.

Advance is made against bills Always with recourse Financial Institution can get the bills re-discounted before they mature for payment.

FACTORING Factor has responsibility of Sales Ledger Administration and collection of Debts. Advance is made against receivables With or without recourse Factor cannot re-discount receivable purchased the

FORFAITING
Forfait is derived from French word A Forfait which means surrender of rights

It is discounting of international trade receivable on a nonrecourse basis.

Forefaiting is a mechanism by which the right for export receivables of an exporter (Client) is purchased by a Financial Intermediary (Forfaiter) without recourse to him.

COMPARATIVE ANALYSIS
BILLS DISCOUNTED 1. Scrutiny 2. Extent of Finance 3. Recourse Individual Sale Transaction Upto 75 80% With Recourse FACTORING Service of Sale Transaction Upto 80% With or Without Recourse Done Short Term FORFAITING Individual Sale Transaction Upto 100% Without Recourse Not Done Medium Term

4. Sales Administration 5. Term

Not Done Short Term