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Uses of funds in Types of working capital loan

commercial banks
(Part 3)  Term loan
 Line of credit (credit limit)
 Invoice financing

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Invoice financing Factoring

 Factoring (Bao thanh toán)  Factoring, receivables factoring or debtor

 Discounting (Chiết khấu) financing, is when a bank buys a debt or invoice
from another company.
 In this purchase, accounts receivable are
discounted in order to allow the factor (bank) to
make a profit upon the settlement of the debt.
 Essentially factoring transfers the ownership of
accounts to another party that then chases up
the debt.
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Process of Factoring
Factoring (cont.)

 Factoring is also seen as a form of invoice

discounting in many markets and is very
similar but just within a different context.
 Factoring can be provided by independent
finance providers, or by banks.

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Process of Factoring (cont.) Process of Factoring (cont.)

1.The seller sells the goods to the buyer and
raises the invoice on customer.
2.The seller then submits the invoice to the factor
for funding. The factor verifies the invoice.
3.After verification, the factor pays 75 to 80
percent to the client/seller.
4.The factor then waits for the customer to make
the payment to the factor.
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5.On receiving the payment from the customer,
the factor pays the remaining amount to the client.
6.Fees charged by factor or interest charged by
factor may be upfront i.e. in advance or it may be
in arrears. It depends upon the type of factoring
agreement.

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Types of factoring
 Recourse factoring: (Bao thanh toán có truy đòi)
– Recourse factoring is an agreement between the
seller and the factor in which the seller is required to
buy back the unpaid bills receivable from the factor.
– Thus, the credit risk stays with the seller in case of
non-payment by the buyer.
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Benefits of Factoring
 Improves seller’s cash flow
 Protects seller from certain type of invoice non
payments
 Allows seller to provide payment terms to their
clients
– Increase sales
 Can be used as short-term funding
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Types of factoring (cont.)
 Non-recourse factoring.(bao thanh toán miễn
truy đòi)
– Under non-recourse factoring, the seller and the
factor enter into an agreement where the factor shall
bear the obligation of absorbing those bills receivable
which remain unpaid.
– Thus, the seller remains unaffected by the unpaid
invoices.
– Of course, interest rate and fee must be higher under
non-recourse factoring contract
Example 1: Factoring
 On 15/02/2020, K&T Clothing Manufacturers has
raised a $2 million invoice for its goods and services
to LHM Co. On the same day, K&T’s bank has
agreed to purchase that invoice and agreed to
advance 80% of the invoice value.
 The factoring period will be 4 months from
15/02/2020, the discount rate is 4% and the fees is
0,15%. Question:
– What is the advance value?
12 – What is the remaining value the bank pay to K&T at
the and of the factoring period?
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Example 2: Factoring (cont.) Invoice Discounting

 On 25/07/2019, company A completed the con contract to  Factoring is also seen as a form of invoice
sell 25.000 tons of rice to company B, with the price of discounting in many markets and is very
$1.250/ton. A allowed B to delay payment 3 months after
receiving the goods. similar but just within a different context.
 On 01/08/2019, A applied for factoring services. The bank
has agreed to purchase that invoice and accepted to
advance 75% of the invoice value, the discount rate is
3,97%/annum, the fees is 0,25%. Question:
– What is the advance value?
– What is the remaining value the bank pay to A at the
and of the factoring period?
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Differences between bill

discounting and factoring Long-term business loan
Factoring Bill discounting
Value added Include some value added services: Dose not include  Long-term equipment can be financed in two
services collections services, full sales ledger
Collection of Factor (bank) The seller
common ways: through a loan or a lease
invoice  Equipment loan
Does the buyer The buyer is aware of the fact that The buyer is not
– An equipment loan is a loan taken out with the
know about the the invoices have been factored. aware of the fact that
factoring/bill the invoices have express purpose of purchasing equipment.
discount? been discounted – Typically, the equipment secures the loan — if you
can no longer afford to pay the loan, the equipment
Cost Factoring is more expensive than Less expensive gets collected as collateral (and will be sold for
invoice discounting because with a
factoring facility you are paying for repayment of the debt)
an outsourced collections
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Leasing process
Equipment lease

 Instead of borrowing money to purchase the Lessor

(leasing
equipment, firms can pay a fee to borrow the company)
equipment.
 The lessor (the leasing company) technically
maintains ownership of the equipment but lets the firm
use it.
 Leasing equipment is a popular option if the firm don’t
have the capital to pay the down payment required for
a loan.
 Normally, the lessors offer the option of purchasing
17 the equipment at the end of the lease term. 18

Example 3: Leasing

 Detail of a car lease contract is as follow:

– Value of the car: 20.000 USD
– Term of lease contract: 5 years
– Payment schedule: Annually equal installment, pay
at the beginning of each year
– Interest rate: 9,5%/annum
 Question:
– What is the monthly installment?
– Create a repayment schedule for the lessee
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