NCRD’S STERLING INSTITUTE OF MANAGEMENT STUDIES

FACTORING PROCESS WITH BANK
PRESENTED TO,
Prof. Mayur 1 Malviya

PRESENTED BY, Mr. Mohd.Shaikh Shahnawaz (A-39)
Ms. Pooja Chandak (B-80) Mr. Amardeep Vengulekar(B-109) Mr.Chetan Shivankar(B107) Ms. Rajeshree Bhoir (B-110)

MEANING

Factoring is a financial option for the management of receivables In simple definition it is the conversion of credit sales into cash In factoring, a financial institution (factor) buys the accounts receivable of a company (Client) and pays up to 80%(rarely up to 90%) of the amountimmediately on agreement. Factoring company pays the remaining amount (Balance 20%-finance cost-operating cost) to the client when the customer pays the debt

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MEANING

factoring against goods purchased, factoring for construction services (usually for government contracts where the government body is capable of paying back the debt in the stipulated period of factoring. Contractors submit invoices to get cash instantly), factoring against medical insurance etc.

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credit sale of goods

Customer
Invoice

Client

Pays the amount (In recourse type customer pays through client)

Pays the balance amount

Submit invoice copy Payment up to 80% initially
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Factor

CHARACTERISTICS
 

Period for factoring is 90 to 150 days

A costly source of finance compared to other sources of short term borrowings
An ideal financial solution for new and emerging firms without strong financials Bad debts will not be considered Cost of factoring=finance cost + operating cost. Factoring cost

Indian firms offer factoring for invoices as low as Rs.1000
For delayed payments beyond the approved credit period, penal charge of around 5 1-2% per month over and above the normal cost is charged

PROCESS WITH BANK
Bank factoring occurs when a business sells some or all of its accounts receivable to a bank in exchange for a cash payout  The payout usually represents a large percentage of the amount due in the accounts receivable, which are payments due to the business from debtors  After the payout, the bank then takes on the role of collecting the accounts receivable, and it pays off the remaining amount due, minus discount fees, to the business once all accounts are collected  bank factoring allows the bank to make a profit and the business to collect working capital at a much faster rate

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PROCESS WITH BANK

Bank factoring occurs when a business sells some or all of its accounts receivable to bank in exchange for a cash payout The payout usually represents a large percentage of the amount due in the accounts receivable After the payout, the bank then takes on the role of collecting the accounts receivable, and it pays off the remaining amount due, minus discount fees, to the business once all accounts are collected The process of bank factoring begins with the business selling its accounts receivable to a bank, which then acts as the factor in the transaction

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Bank immediately gives the business a lump sum payment that represents a large portion of the amount Once those payments are collected, the bank then returns the remaining money owed the business from the accounts receivable, but only after taking out its own discount fees The bank usually bases its fees on the amount of money owed the business, the amount of time given the debtors to pay, and the credit status of those debtors Bank factoring is especially useful for small businesses that may not yet have the capital to show for all of their enterprises

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ADVANTAGES
   

Time Savings Good Use for Growth Doesn’t Require Collateral

Qualify for More Funding

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DISADVANTAGES
  

The Stigma Less Control The Cost

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CASE STUDY
     

James Manufacturing is a small builder of boat trailers and related products in Southwest Florida. Bill James, its owner, was awarded a contract to supply the th 72 new trailers Each trailer was $2,900 for a total value of $208,800 James had 20 trailers in inventory to begin delivery James Manufacturing had little excess capital James did not receive payment for the 20 trailers he could immediately deliver for nearly 45 days... He needed cash to order bulk steel and hardware to build the remaining 52 trailers and delver them in 60 days before deadline James had virtually no credit history still went for loan to bank officer

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CASE STUDY
The loan officer explained that what James really needed was factoring.  Later,James was introduced to the bank's factoring officer where an account was immediately established to provide the necessary working capital to meet the order.  Through factoring, James would receive an initial advance from the bank of $46,500 (80%) on the $58,000 invoice after delivery of the 20 finished trailers in inventory.  That advance of $46,500 was enough to then buy the bulk steel and hardware to complete the other 52 trailers in time to meet the required delivery deadline.  After the state paid for the 20 trailer shipment, the bank would then give James the $11,500 not initially advanced less a small factoring fee for services.

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CASE STUDY
The bank's factoring arrangement helped James to bid on many more contracts  The factoring arrangement geared the business of James  It sped up the company's cash flow  Discount for materials paid for almost 75% of the bank's factoring fee making the overall expense for the factoring facility miniscule  Beside, arrangement with the bank had almost no upper credit limit.

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Thank You

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