Factoring Services

to the factor. Canada in May 1988.Definition And Classification of Factoring One of the most acceptable definitions of factoring is the one given by the Unidroit Convention on International Factoring held in Ottawa. family or household use. receivables arising from contracts of sale of goods made between the suppliers and its customers (debtors) other than those for the sale of goods bought primarily for their personal. . According to this definition: ‘Factoring contract means a contract concluded between one party (the Suppliers) and another party (the Factor) pursuant to which: (a) The supplier may or will assign.

(Reference to ‘goods’ and ‘sale of goods’ shall include services and supply of services) . including loans and advance payments. (c) Notice of the assignment of the receivables is to be given to debtors. (iii) Collection of receivables. (ii) Maintenance of accounts (ledgering) relating to the receivables.Definition And Classification of Factoring (b) The factor is to perform at least two of the following functions: (i) Finance for the suppliers. (iv) Protection against default in payment by debtors.

(b) Credit control (c) Insurance cover for the default of the debtors (d) Provision of post sale finance .Full Factoring (a) Collection of receivables and maintenance of sales ledgers.

the responsibility to reimburse the amount paid in advance by the Factor lies with the suppliers. .Resource Factoring (a) Insurance cover for the default of the debtors not provided. (b) In case of default on the part of the debtors. (c) Collection of receivables and maintenance of sales ledgers.

the payment will be made by the Factor on collection of the invoice or on maturity date with recourse to the client later on.Maturity Factoring (a) Collection of receivables and maintenance of sales ledgers (b) No provision for post-sales finance before the maturity date or before the end of the credit terms. This type of factoring may or may not provide insurance cover for the default of the debtors. In the former case. In case of insolvency of the debtor. payment will be made to the client even before maturity. In the latter case. the amount will be paid to the client (suppliers) irrespective of whether or not the Factor had been able to collect. .

The interest of the Factor is notified directly to the debtors. one common feature is the provision of collection of receivables and maintenance of sales ledgers. A drawing limit is fixed on the basis of the invoices accounted for. (b) Provision of post-sales finance.Advance Factoring (a) Collection of receivables and maintenance of sales ledgers. the arrangement between the Factor and the client is disclosed. Thus. In all the above types of factoring services. . (c) This type of factoring may or may not provide insurance cover for the default of the debtors.

(a) While the client himself maintains the sales ledger. debts are assigned to the Factor. But the debtors are not notified of the involvement of the Factor. payment received in respect of those invoices from the debtor is handed over to the Factor on collection.Undisclosed Factoring This is another type of factoring where the debtors are not notified of the arrangement between the Factor and the client. (c) Debt collections is undertaken by the client. . Where advance payment has been received from the Factor in respect of the invoices. (b) The Factor gets a copy of the invoice which it accounts for and provides the client with either default cover or finance or both.

. (e) The services offered may be on a non-recourse basis and / or seasonal and / or selective basis. The client’s sales ledger is also inspected by the Factor at regular intervals.Undisclosed Factoring (d) An age-wise analysis of the debts at regular intervals is received by the Factor from the client to keep a check on its risk.

performs other book keeping functions associated with such accounts receivables and attends to other auxiliary functions.Invoice Discounting (a) Similar to undisclosed factoring under which the Factor purchases all or selected invoices at a discount. . Briefly stated. purchases his receivables as they arise in return for the provision of post-sale finance (with or without providing insurance cover for the default on the part of the debtors). maintains the sales ledger. contemporary factoring in general involves a continuous arrangement under which a financing institution assumes the credit control/protection and collection functions of the client. (c) Provision of finance. (b) Debt collection and maintenance of sales ledger are not provided.

On the other hand. Thus. factoring business essentially differs from banking business in the following respects: 1. if the dues are not realized. Factors generally provide insurance cover for the default of the buyer.e. the credit support extended by banks is for a pre-determined period and. banking institutions also provide post-sale finance to trade and industry. In spite of this important similarity between Factors and banks.Banking Services vis-à-vis factoring services Essential Differences One of the important services rendered by a Factor is the provision of post-sale finance to the seller/supplier. In this respect. the bank generally calls upon the seller/ supplier to repay the finance. Finance provided by banks is with recourse to the seller/suppliers who has to bear the risk of default by the buyer. i. Factors generally extend credit support by assuming the risk of default in payment by buyers. .. on the expiry of the period.

In other words. machinery replacement programmes and other technical aspects of the client’s business. In majority of the cases. while the Factors purchase receivables of the seller/supplier.Banking Services vis-à-vis factoring services 2. finance provided by the a bank is in the form of purchasing/discounting of bills of exchange drawn on the buyer and accepted by him. banks finance receivables by way of advances. finance is provided on book debts assigned in its favour. 3. Factoring services are not merely confined to the provision of post-sale finance. But in the case of a Factor. but they also cover such services as maintenance of sales ledger and advisory services including work-load analysis. . while the Factor is actively interested in following-up bills and payment of debts. The banker does not follow-up payment of bills.

5. indicating the extent to which it is prepared to accept the client’s receivables on such customers without recourse to the client. The Factor establishes credit limits for individual customers. the cost of servicing of a Factor is generally higher than that of a bank. As a natural corollary to the various services offered by a Factor. . A banker does not undertake any such specialized service.Banking Services vis-à-vis factoring services 4.

they are not quite suitable or necessary for the following types of business concerns: (i) Those selling principally on cash terms. . (iii) Those wherein progress payments are involved. it may be noted that factoring is a highly specialized business requiring constant vigilance against overtrading or dishonesty on the part of the clients. (ii) Those which undertake job works. In addition. Dishonesty may take the form of fictitious invoicing and / or duplicate invoicing.Limitations of Factoring Although the services provided by Factors are beneficial to a very large number of sellers/suppliers. (iv) Those which sell a large number of small products of various types to individual customers. (v) Those which have a high concentration on only a limited number of debtors.

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