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F A C TO R I N G
Credit management is a specialised activity, and involves lots of time and efforts of a company. Collection of receivables poses problems, particularly for small scale enterprises. Banks have a facility provide financing receivables but it is for the limited period and the sellers of goods and services has bear a risk of defaults by the debtors. So, a company can assign its credit management and collection to specialised organisation called factoring organisation. Factoring is a popular mechanism of managing, financing and collecting receivables in many countries including India. In India following banks are providing this facility. 1. State Bank of India 2. Canara Bank 3. Punjab National Bank 4. Allahabad Bank

Nature of Factoring
Factoring is a unique financial innovation which provide both financial as well as a management support to the company. Popularly said it is a method of converting nonconvertible, inactive assets in to productive assets by selling receivable to the company that have specialises in collection and administration. It is quite obvious that number of companies have scare resources of cash if it takes a long time to receive payment for goods and services. Such a assets of the company which is non performing which is advisable to sell this receivable and convert this assets in to the performing assets and immediately employ in to the company. IN simple word this process of conversion is called as the factoring. Factoring can be defines “as a business involving a continuing legal relationship between a financial institution and a business concern selling goods or providing services to trade customers whereby the factor purchases the client‟s account receivables and in relation thereto, controls the credit, extended to customer and administers the sales ledger”

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Factoring Services
Factor also provides the following three basic services to the client while purchasing the receivables from the company.    Sales ledger administration and Credit management Credit collection and protection against default and bad-debt losses Financial accommodation against the assigned book debts.

Credit Administration A factor also provides full credit administration services to his clients. He helps and advises them from the stage of deciding credit extension to customers to the final stage of the book debt collection. The factor maintains an account for all customers of items owning to them, so that the collection could be made on doe date or before. He helps clients to decide whether or not and how much credit to extend to customers. He also provides clients with information about market trend, competition and customers and helps them to determine the creditworthiness of customers. Credit collection and protection When individual book debts become due from the customers, the factor undertakes all collection activities that is necessary. He also provides full or partial protection against bad debts. Because of his dealing with a variety of customers and defaults with different paying habits, he is in the better position to develop appropriate strategy to guard against possible defaults. Financial Assistance Often factors provide financial assistance to the client by extending advance cash against book debts. Customers of Client become the debtors of the factor and have to pay to him directly in order to settle this obligation. Thus, Factoring involves outright purchase of debts, allowing full credit protection against any bad debts and providing financial accommodation against the firm‟s book debts. Perhaps, it is like a short term financing mean for the company by selling its books receivables to the factoring organisation with a purpose of taking facilities like credit administration, collection, and protection.

3 Other Services by factor In many countries factors also provides many other services and facilities to the clients which are as below: i. ii. iii. iv. v. Providing information on prospective buyers Providing financial counselling Assisting the clients in managing its liquidity sickness Financial acquisition of inventories Providing facilities for opening letter of credit by the client.

Factoring and Short term Financing
Although factoring provides short term finance accommodation to the company but it cannot be use as synonym. It differs from the other types of short term financing resources of the firm in following respects:  Factoring involve sale of book debts and in return client obtains advance cash against the expected debt collection and does not incur any bad debts. However, in the case of short term financing there is no need to sale any assets of the company but obtaining a cash by mortgaging the assets to any financial institutions or banks.  Factoring provides flexibility as regards credit facilities to the client. He can obtain cash either immediately or on due date or from time to time, as an when the company need a cash. Such flexibility is not available from formal sources of credit in terms of short term finance.  Factoring is a unique mechanism which not only provides credit to the client but also undertakes the total management of the client‟s book debts. In a case of short term financing, no banks or financial institutions have a interference in the management of the company‟s account.

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Factoring and Bills Discounting
Factoring should be distinguished from bill discounting. Bills discounting or invoice discounting consists of the clients drawing bills of exchange for goods and services on buyers, and then discounting it with bank for charge. Thus, like factoring, bills discounting is a method of financing. However, factoring is all of bills discounting plus much more. Bills of discounting have following limitations in comparison to factoring.
   Bills of discounting are a sort of borrowings while factoring is the efficient and specialised management of book debts along with enhancing the client‟s liquidity. The client has to undertake the collection of books debts. Bills of discounting are always „with resource‟, and as such the client is not protected from the bad debts. Bills of discounting are not a convenient method for companied having a large numbers of buyers with small amounts of collections since it is quite inconvenient to draw a large numbers of bills.

Types of Factoring
The factoring facilities can be broadly classified in to four main groups 1. Full service non-resource 2. Full service resource factoring 3. Bulk/agency factoring 4. Non-notification factoring

Full service non-resource
Under this method, book debs are purchased by the factor, assuming100 percent credit risk. The full amounts of invoices have to be paid to the client in the event of debt becoming bad. He also advances cash up to 80-90 percent of the book debts immediately to the client. Customers are required to make payment directly to the factor. The factor maintain the sales ledger and accounts and prepare are wise reports of outstanding book debts. This is also called as old-line factoring. Non-resource factoring is most suitable to be in following situation.

5    Amount involves per customer are relatively substantial and financial failure can jeopardise client‟s business severely. There are large number of customers of whom the client does not have personal knowledge and The client prefers to obtain 100 percent cover under factoring rather than take insurance policy which provides only 70-80 percent cover.

Full service resource factoring
In this type of factoring, the client is not protected against the risk of bad debts. He has no indemnity against unsettled or uncollected debts. If the factor has advanced funds against book debts on which a customer subsequently defaults, the client will have to refund the money. This type of factoring often used as a short term financing, rather than credit management and protection services. It is less risky from the factor‟s point of view and thus it is less expensive to the client than non-resource factoring. This type of factoring also proffered when large spread of customers with relatively low amount per customer is involved, or the client is selling to high risk customers.

Bulk/agency factoring
This type of factoring is basically used as a method of financing bed debts. Under this the clients continue to administer credit and operate sales ledger. The factor finances the bulk debts against bulk either on resource or without resource. This sort of factoring became popular with development of mini computers market where marketing and credit management was not a problem but the firms‟ needs temporary financing accommodation.

Non-notification factoring
In this type of factoring, customers are not informed about the factoring agreement. It involves the factor keeping the accounts ledger in the name of sales company which the client sells its book debts. It is through this company that the factor deals with client‟s customers. The factor performs all his usual functions without a disclosure to customers that he owes the book debts of their creditors.

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Costs and Benefits of Factoring
As factoring organisation exists for the sake of earning, company have to bear the cost that factoring organisation levy for the services and facilities they provide to their clients. The following costs are there to get benefits of factoring;   The factoring commission or service fees The interest on advance payment by the factor to the firm Factoring commission is paid for the credit evaluation and collection and other services and to cover the bad debts losses. It is usually expressed in terms of percentage of full net face value of receivables factored, and generally it ranges between 1 to 3 percent. In fact in most of the cases the commission is depend on the volume of total receivables, the size of individual receivables, and the quality of receivables. It is obvious that the factoring commission or the fees are higher in the case of non-resource since the factor bares the risk of entire credit. The factor charges the interest if the company take the payment in advance. These interest rates are generally higher than the prevailing prime rate of banks and the financing institutions. In India, comparing to the other countries, are higher since the prime lending rate are 14 to 16 percents. It is visible that the factoring is so expensive for the company, so why should firms do for it? There are certain benefits which result from factoring receivables, and they more than offset of cost of factoring. Following are the benefits of the factoring;  Factoring provides the specialised service in credit management, and thus, helps the firm‟s management to concentrate on other important work like manufacturing and marketing.   Factoring helps the firm to save the cost of credit management due to scale of economics and specialization. Since client need not have a special administration set up to look after credit control and administration he can have the benefits of reduces overhead by way of saving on manpower, times and efforts.

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Bibliography
Factoring: Wikipedia.org. (2009, March). Retrieved January 22, 2012, from Wikipedia the free encyclopedia: http://www.wikipedia.org M. Y. Khan and P. K. Jain(2008). Financial Management. New Delhi: Tata McGraw Hill Companies. Pandey, I. M. (1999). Financial Management. New Delhi: Vikas Publication House.