Factoring - Presentation Transcript

1. FACTORING
PRESENTED BY:-
AMIT DANGE.
TY.BBI
2. DEFINITION
Factoring is a financial transaction whereby a
business sells its accounts receivable (i.e., invoices)
to a third party (called a factor) at a discount in
exchange for immediate money with which to
finance continued business. Factoring differs from a
bank loan in three main ways. First, the emphasis is
on the value of the receivables (essentially a
financial asset), not the firm’s credit worthiness.
Secondly, factoring is not a loan – it is the purchase
of a financial asset (the receivable). Finally, a bank
loan involves two parties whereas factoring involves
three.
It is different from the forfaiting in the sense that
forfaiting is a transaction based operation while
factoring is a firm based operation - meaning, in
factoring, a firm sells all its receivables while in
forfaiting, the firm sells one of its transactions.
3. REASON FOR FACTORING
Factoring is a method used by a firm to obtain Cash
 when the available Cash Balance held by the firm is
insufficient to meet current obligations and
accommodate its other cash needs, such as new
orders or contracts. The use of Factoring to obtain
the Cash needed to accommodate the firm’s
immediate Cash needs will allow the firm to maintain
a smaller ongoing Cash Balance. By reducing the
size of its Cash Balances, more money is made
available for investment in the firm’s growth. A
company sells its invoices at a discount to their face
value when it calculates that it will be better off using
the proceeds to bolster its own growth than it would
be by effectively functioning as its
"customer's bank." Accordingly,
Factoring occurs when the rate of return on the
proceeds invested in production exceed the costs
associated with Factoring the Receivables.
Therefore, the trade off between the return the firm
earns on investment in production and the cost of
utilizing a Factor is crucial in determining both the
extent Factoring is used and the quantity of Cash
the firm holds on hand.
4. FUNCTIONS OF THE FACTORING
Financing facility
Maintenance or Administration of a sales ledger
Collection facility of accounts Receivables
Advisory service
5. ADVANTAGES
This is a off-balance sheet financing process.
Reduction of current liabilities.
Improvement in current ratio.
More time for planning & production.
Reduction of cost & expenses.
6. TYPES OF FACTORING
Recourse factoring.
Non-recourse factoring.
Maturity factoring.
Invoice factoring.
7. RECOURSE FACTORING
This is a type of factoring in which receivables are
sold to the factor with the understanding that all
credit risk would be the bond by the firm.
8. NON-RECOURSE FACTORING
This a type of factoring process in which receivables
are sold to the factor with the understanding that all
credit risk would be bond by the factors.
9. MATURITY FACTORING
In this type of factoring , factor does not make any
advance payment to the client. The amount will paid
by the factor on the guaranteed payment date or at
the time of collection from debtors.
10. INVOICE FACTORING
It is simply a bill discounting process.
Invoice discounting is a form of short-term borrowing
often used to improve a company's working
capital and cash flow position.
Invoice discounting allows a business to draw
money against its sales invoices before the
customer has actually paid. To do this, the business
borrows a percentage of the value of its sales ledger
from a finance company, effectively using the unpaid
sales invoices as collateral for the borrowing.