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Presentation On

Factoring of Accounts
Receivable
By
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July 28, 2003 Page: 2
Factoring of Account Receivables
Financing against invoices raised by the supplier
after making the delivery successfully.

Revolving Short Term Facility
Permanent Assignment of Payment
Financing against invoices
Post-delivery Financing
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1. Client assigns the payment against delivery to IDLC
2. Client makes delivery to the Buyer against WO
3. Client submits delivery challan and bill/invoice to Buyer
4. Client submits delivery challan and bill/invoice to IDLC
5. IDLC makes advances to Client against the submitted invoices
6. Buyer makes payment to IDLC
7. IDLC reimburses the balance amount
Mechanism
Mechanism
IDLC
Client
Buyer
3
2
5
6
7
4
1
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Portfolio of Customers
BUYER /
CUSTOMER

BUYER /
CUSTOMER

BUYER /
CUSTOMER
BUYER /
CUSTOMER
BUYER /
CUSTOMER
SUPPLIER /
CLIENT
Sales Ledger Audit
Permitted Limit for each customer
Permitted Credit Term for each customer
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Sales Ledger Audit (SLA)
Party ledgers of last one year customer wise
We look for
Relationship since
Monthly sales
Monthly collection
Deductions (%)
Sales return (%)
Net
Collection
Ave.
Monthly
Balance
Ave. Monthly Sales
Ave. Monthly Receivables
Ave. Deduction
Ave. Receivable Turnover in days
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1. Assignment of Payment
Assignment Letter from the Client
STF Agreement between client and IDLC
Taking working capital financing from IDLC
Make all payments to IDLC in the following manner:
IDLC A/C#559 (A/C: Client Name)
Irrevocable until further notice from IDLC
Request for confirmation letter
payment as per request

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Continued
Assignment Letter from IDLC
STF Agreement between client and IDLC
Taking working capital financing from IDLC
Make all payments to IDLC in the following manner:
IDLC A/C#559 (A/C: Client Name)
Irrevocable until further notice from IDLC
Request for confirmation letter
payment as per request
Meeting with the customer/buyer
Receiving payment confirmation from the buyer
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2. Delivery
The client submits invoices along with
Delivery challan
VAT challan (if any)

The Asst. Officers/ Officers check the submitted Invoices
and Challans
Check list
3. Submission of Invoices/bills
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3. Financing

Inv. Amount Ad. Payment % X
=
=
Inv. Amount
Ad. Payment % Dis. Balance [ ]

Due Invoices = Invoices outstanding till maturity (till the end of credit term)
Overdue = Invoices outstanding beyond maturity, but not exceeding the

grace period
Overdue Disapprove = Invoices outstanding beyond grace period
Sales Ledger Disapprove = Sales Ledger Balance Permitted Limit

(if SLB > Permitted Limit)

Available Fund
Current A/C Balance X
- -
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4. Collection against invoices
Payment in the name of IDLC
Invoice wise payment or lump sum payment
Allocation of collected amount
Checking AIT deduction? other deduction?




5. Reimbursement of Balance Amount
Reimbursement amount
= Invoice amount x Balance % - New Disapprove Balance
On Line Approval (Disbursement memo)
Issuing cheque in favour of the client


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Major Terms & Conditions
Credit Limit revolving limit [general and customer specific]
client requirement & SLA data
clients forecast

Expiry 1 year from Agreement; Renewable

Maximum Credit Term [general and customer specific]
client requirement & SLA data
clients forecast
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Continued
Service Charge (0.4%-0.7%)
calculated on the gross invoice amount
depends on bargaining power
should be enough to cover service cost
fair rate so that client retention rate is improved
realized at the point of disbursement against invoices
loaded in the loan a/c immediately after
purchasing invoices

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Continued

Factoring Discount (14.5%-15.75%)
depends on bargaining power
calculated on daily loan balance
should cover IDLCs cost of fund
should be fair rate so that client retention rate is
improved
realized at each month end
loaded in the loan account

Expected Effective Rate
varies from client to client
usually around 17%-18%
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Book Keeping
Sales Ledger Control Account



Current Account (Loan Account)
For Client
For Each Customer
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Security
Mandatory
Assignment of payment (permanent assignment)
Floating charge on receivables
(filing with RJSC in case of Ltd. Company)
Personal guarantee from Directors
Security cheque covering full sanctioned limit
Recourse on the client
Optional
Corporate guarantee (if necessary)
Cash security (% of sanctioned limit)
Equitable/registered mortgage on property
Any other security


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Documentation
Sanction letter
Loan agreement
Demand promissory note
Client promises to pay the sanctioned amount at given int. rate
Letter of revival
Acknowledges the liability for payment of promissory note
Letter of continuity
Agrees to execute DP note and other relevant documents
Undertakes to remain liable on DP note and other docs
Undertaking
Declares that they will not obtain any financing from any
person(s) and/or institution(s) against the assignment of
receivables of the client without prior consent of IDLC.

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Continued
Letter of guarantee (Joint/Several)
Extract of the Board resolution (if limited company)
Notarised Irrevocable general power of attorney
Client empowers IDLC to collect, receive, deposit, encash,
transfer the proceeds against all receivables of the client
arising out of the business transactions with their customers
Deed of floating charge on receivable
Client agrees to secure loan, amongst other means, creating a
priority floating charge on all book debts (receivables)
Form XIII duly filled up and signed by the client
Corporate guarantee (if any)
Deed of Mortgage & Undertaking (if any)
Any other documents relating to any other collateral

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Marketing
Target Group
Small and medium clients
Minimum monthly turnover of Tk.1.0 million
Frequent supply to few fixed customers
Considerable invoice size
Working capital crisis growth prospect (cash purchase
credit sale)
Customers/buyers with consistent payment performance
Suppliers with good reputation
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Continued
Current Portfolio







9
5
2
1
1
1
Printing &
Packaging
Other Services
Transport
Construction &
Engineering
Food & Beverage
Pharmaceutical
Other Manufacturing
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Continued
How to Market
Assessing the need of the prospect for working cap
Convincing the prospect that Factoring will improve cash flow
and thus will increase the business volume
Marketing the services follow up and reporting
IDLCs experience in this field
IDLCs network makes assignment process and collection and
follow up job easier
Need basis financing small amount and less probability to be
used otherwise
Our service prompt payment
Flexibility limit enhancement, increasing credit terms
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Continued

No commitment fee cab be cancelled anytime if not satisfied
Ensuring confidentiality
Package sale advantages: security, less costly

Information Required
MEMART, Form XII, financial statements, liability positions,
corporate profile, Directors profile, etc.
Complete Sales Ledger (past one year)
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Problems Encountered
While marketing
What is IDLC
Reluctance to open their books (sales ledger)
Interest rate competing with banks
Competing with traditional short term credit lines like CC, OD
hastle free
Reluctance to assign payment/ involve customers
Reluctance to pay service charge
Reluctance to provide security only assignment of payment
Interested to take financing against bad accounts only
Reluctance to give security cheque

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Continued
During Assignment (with Buyer)
Difficult to get appointment reluctance to meet IDLC (third
party)
What is IDLC to customers
Does IDLC have permission for WO financing
Payment can not be assigned only to NBFI
Time consuming assignment for each WO, outside Dhaka
Policy does not permit assignment
Difficulty in obtaining confirmation letter (in case of MNCs
approval of parent company is required)

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Continued
During Financing
Does not understand the process of adjustment against
Disapproved Bills
Request for financing against fresh bill even when negative
financeable amount

During Followup (with Buyer)
Reluctance to talk to IDLC people specially in the beginning
Non-availability of contact person
Number of phone calls for a single collection
Difficulty in obtaining complete information
Contact person does not know
Does not want to disclose to us (asks the client to contact)
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Risks
Comparatively risk is low because of post delivery financing.
However, most commons risks are:

Direct payment intentional / unintentional
Arrangement between buyer and seller
Fake invoices false delivery
Forgery short supply
End of relationship between client and customer

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