FACTORING AND FORFAITING

Factoring
Latin

Word- ‘facere’ Originated –USA,UK and France to assits firms A relationship created by an agreement between the seller of goods/service and the financial institution(factor). Receivables arising out of sale of goods/service are sold by firm.And the said receivables is passes on to factor.And factor become responsible –sale accounting,credit

Parties of Factoring
Buyer Seller Factor

of the goods i.e. financial institution

Steps involved in factoring transaction
SALEOF GOODS(2)

AGREEMENT(1)
SELLING FIRM FACTOR CUSTOMERS RECEIVABLES

INVOICE COPY(3) ADVANCE PAYMENT/DISCOUNTING (4)

FINAL PAYMENT AFTER DEDUCTING FEES AND CHARGES,IF ANY(5)

PAYMENTS

Types of Factoring
A.Recourse and Non-recourse Factoring B.Advance and Maturity Factoring C.Conventional or Full factoring
• • • • • • Collection of receivables Maintenance of sales ledger Credit collection Credit control Credit Insurance Credit risk

D.Domestic and Export factoring E.Limited Factoring

Types of Factoring (Cont…)
F.Selected Seller Based Factoring G.Selected Buyer Based Factoring H.Disclosed and Undisclosed Factoring
• • • •

Functions of a Factor
Administration

of sellers sales

ledger Collection of receivables purchased Provision of finance Protection against risk Advisory servicesq Customer’s perception for client products q Marketing strategies, emerging trends q Suggests improvements-invoicing, delivery and sales return q Helping for raising finance from financial institutions

ADVANTAGES
§ Cost savings § Liquidity § Credit discipline § Efficient production § Cash flow § Better purchasing planning § Avoid bad debt § Boosting the efficiency ratio

Limitations of factoring
No

insurance available for credit Difficult for factor to collect money due, if buyer and seller are in different area Lack of professionalism ,competence, underdeveloped expertise, resistance to change Limited funds – supplier Lack of proper credit information

Factoring cost

Commission
q Charge for collection q Sale ledger administration q Credit control q Collection of debt q Providing protection against bad debt

• •

Interest Charge

Factoring in India
and forfaiting , was set up by RBI in 1988, under the recommendations of the Kalyansundaram committee •RBI guidelines: qPrior approval qSubsidiaries qExclusive business qReporting

Factoring

Major factoring firms
1.SBI FACS - First factoring company in 1991(SBI,SIDBI,UBI) 2.Canback factors-Canara Bank, Andhra bank and small industrial development bank(60:20:20) 3.Foremost Factors- 1st private sector •New entrants are I. ICICI II.HSBC III.Global Trade finance(international factoring, domestic factoring and forfaiting services)

Sl . Characteristic Factoring No
1 Recourse May be with or without recourse Factor is a collector receivables Besides financing facility,many other services are also extended

Bills Discounting

Only with recourse

2

Collector

of Drawer is the collector of receivables Only financing facility is available

3

Services

4.

Refinancing

Receivables once factored Bills once discounted can be cannot be refactored rediscounted Financing arrangement Financing is bill based covers entire quantum of receivables

5

Bulk finance

6

Mode of accounting It is off balance sheet financing

No such possibility

FORFAITING
French

term - forfait A form of financing of receivables arising from international trade. A bank/financial institution undertakes the purchase of trade bills/promissory notes without recourse to the seller All risk become full responsibility of forfaiter Forfaiter pays cash to seller after

Parties to forfaiting
Exporter Importer Exporter’s

bank Importer’s bank The forfaiter

Modus Operandi
1.Commercial contract 2.Transaction 3.Notes acceptance 4.Factoring contract 5.Sale of notes 6.Payment

Advantages of forfaiting
Eliminates

Risk Improves Cash Flows Fast, tailor-made financing solutions Commitments can be issued within hours/days depending on details. No restrictions on origin of export. Relieves the exporter from administration and collection

Limitations
 It

is generally not available for shortterm financing.  The exporter is responsible for obtaining a bank guarantee for the buyer.  The exporter is responsible for the quality/condition of goods, timeliness of delivery, overshipment, and contract disputes.  Because of the required bank guarantee, the importer's bank line of credit is reduced by a corresponding amount.  Interest costs and commitment fees

Difference in factoring and forfaiting
 

 

Factoring refers to domestic bill purchase and discount A factor finances 75-85% of the account receivables and retains the balance as a reserve till the actual payment is made on the date of maturity It may be with or without recourse. Short term transactions involving credit period of upto 180 days are handled  It is a continuous arrangement.

 Forfaiting

refers to discounting of foreign credit bill in respect of international trade.  A forfaiter discounts the entire value of the bill.  It is a pure financial arrangement and its always without recourse  Financing for medium to long-term credit periods is provided but short term credit (30-180 days) facilities are also

 Responsibility

collection is accepted by factor  Charges are applied for financing, collection, sales adminis, credit protection, provision of information  No restriction on minimum size of transaction  Contract is between seller and factor   Besides financing,a factor also provides other services such as ledger

for

 Collection

of forfaited debt only.  Single discount charge is made depending on: Guaranteeing bank and country risk, credit period involved, current of debt and additional charges made during delivery period.  Minimum value of USD$ 250.00 per transaction  Contract between exporter and forfeiter

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