A case study on Factoring and

Bank Loan services

Prof. Subhasis Pal

HOD- M. Com. & BBA
SCOAC, Pune
M . Com.(A/c) , M. Com.(Buss, Admin) , MBA
(Fin.),PGDM,PGDMM ,PGDHRM , LLB , ICWA(Inter) ,
NET (Com.) , NET (Mgt.), DME , M. Phil., Ph. D
(Pursuing)
 Case Description in Brief
• The turnover of PAL India Ltd. is Rs. 60 Lakhs, of which
80% on credit. Debtors are allowed one month to clear
off the dues . A factor is willing to advance 90% of the
Bills raised on credit for a fee of 2 % per month plus a
commission of 4 % on the total amount of Debts.
• PAL India Ltd. as a result of this arrangement is likely to
save Rs.21,600 annually in management cost and avoid
bad debts at 1 % of credit sales.
• Tanuja Bank Ltd. has came forward to make an advance
equal to 90 % of the debt at an annual interest rate of 18
% . However its processing fees will be at 2 % on the
debt.
• What option you would prefer between Factoring and
Financing from the Bank and why ?
• Note: Consider the calculation on 1 month basis.
1)Turnover of PAL India = Rs. 60 lakhs annually
2) Its 80% sales are made on a credit basis, and
has two options for Debtor receivables
financing:
a. Factoring (Credit fee of 2 % and commission
of 4 %)
b. Bank Financing (Interest rate of 18 % and
Processing fees of 2 %)
 Objectives

1. To Study Factoring and Bank Loan

2. Relation between the two

3.To calculate and make decision on the basis of

Factoring and Bank Loan
 Problems for Discussion

1.What are Financial services

2.Concept of Factoring and Bank loan

1. Cost of Factoring ?

2. Cost of Financing ?
 Decision
• The cost which is less is to be opted.

Note :
a) Total Approach : Profit / Cost
b) Incremental Approach : Profit / Cost
 1.
• Fee: 0.02*0.09 *400000= Rs.7200
• Commission: 0.04 * 400000 = Rs.16000
• Hence, total cost = Rs.23200
• Less: Saving in cost
• Management cost : 21600/12 = Rs.1800
• Saving in bad debts:0.01* 400000 =Rs. 4000
• Total Savings = Rs. 5800
• Hence, Net cost = 23200 – 5800= Rs.17400
2.

• Interest: 0.18 * 1/12 * 0.9* 400000 = Rs. 5400

• Processing fee : 0.02 * 400000 = Rs.8000
• Bad debts : 0.01 * 400000 = Rs.4000
• Hence, total cost = Rs.17400
Solution

1) As both the options( factoring and bank

financing) have the same cost, any alternative
can be chosen here

2) In case for different costs, go for the option

with a lower cost.
• Concept of factoring,
• credit sales, debtors,
• Deciding preference over bank finance and
factoring
Recent Publication of Text Book