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Factor - Meaning
 Factor means “to make or to do” in other
words ‘to get things done’
 Dictionary meaning of Factor means ‘an

agent’, engaged in financing the

operations of certain companies,
through the purchase of account
receivables.
 Why we need Factoring?
 For Smooth cash flow

 For meeting working capital needs

 Overcome the situation from high

cost of capital and reduced profit

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Factoring -
Definition
Definition:
 Factoring is defined as ‘a continuing legal
relationship between a financial institution (the
factor) and a business concern (the client),
selling goods or providing services to trade
customers (the customers) on open account
basis whereby the Factor purchases the
client’s book debts (accounts receivables)
either with or without recourse to the client and
in relation thereto controls the credit extended
to customers and administers the sales
ledgers’.
CONCEPT OF
FACTORING
 Factoring is a financial option for the
management of receivables.
 Factoring, basically involves transfer of
the collection of receivables and related
bookkeeping function from the firm to a
financial intermediary called the
FACTOR.

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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 amount immediately 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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CHARACTERISTICS OF
FACTORING
 Usually the period for factoring is 90 to
150 days.
 Credit rating is not mandatory. But the
factoring companies usually carry out
credit risk analysis before entering into
the agreement.
 Factoring is a method of off balance
sheet financing.
 Bad debts will not be considered for
factoring.

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 Indian firms offer factoring for invoices as low
as 1000Rs
 Cost of factoring=finance cost + operating
cost. Factoring cost vary according to the
transaction size, financial strength of the
customer etc.
 The cost of factoring vary from 1.5% to 3%
per month depending upon the financial
strength of the client's customer.
 For delayed payments beyond the approved
credit period, penal charge of around 1-2%
per month over and above the normal cost is
charged.
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Terms and Conditions
 Assignment of debt in favor of factor

 Selling limits for the client

 Conditions within which the factor will

have recourse to the client in case of non-
payment by trade customer
 Details regarding the payment to the factor
for his services
 Limit of any overdraft facility and the rate
of interest to be charged by the factor Assignment of debt
in favor of factor
 PROCESS OF
FACTORING
credit sales
Of goods (1)
client customer
Invoice (2)

Submit invoice
Payment up Copy(3) Pays the
to 80% amount(5)
intially(4)
factor
Pay the balance amt
(6)

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FORMS OF FACTORING
 Recourse and Non recourse factoring
 Disclosed and undisclosed factoring
 Advanced factoring
 Maturity factoring
 Full factoring
 Cross border factoring

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RECOURSE FACTORING
 In recourse factoring, client undertakes
to collect the debts from the customer. If
the customer don't pay the amount on
maturity, factor will recover the amount
from the client. This is the most common
type of factoring. Recourse factoring is
offered at a lower interest rate since the
risk by the factor is low. Balance amount
is paid to client when the customer pays
the factor

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NON RECOURSE
FACTORING
 In non recourse factoring, factor
undertakes to collect the debts from the
customer. Balance amount is paid to
client at the end of the credit period or
when the customer pays the factor
whichever comes first. The advantage of
non recourse factoring is that continuous
factoring will eliminate the need for
credit and collection departments in the
organization

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 Disclosed
In disclosed factoring client's customers are
notified of the factoring agreement. Disclosed
type can either be recourse or non recourse.
 Undisclosed
In undisclosed factoring, client's customers are not
notified of the factoring arrangement. Sales
ledger administration and collection of debts are
undertaken by the client himself. Client has to
pay the amount to the factor irrespective of
whether customer has paid or not. But in
disclosed type factor may or may not be
responsible for the collection of debts
depending on  whether it is recourse or non
recourse.
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Two-Factor System of Factoring
 There are usually four parties to a cross-
border factoring transactions
Exporter (client)
Importer (customer)
Export Factor
Import Factor
 Two factor system results in two
separate but inter-linked agreements
Between exporter and export factor
Between export factor import factor
Two-Factor System of Factoring
 Functions of factors are divided between
export factor and import factor
 Import factor provides a link between export
factor and the importer and serves to solve the
international barriers like language problem,
legal formalities and so on. He also
underwrites customer trade credit risks,
collects receivables and transfers funds to the
export factor in the currency of the invoice
 Country A Country B
Goods and invoices – Stage I
Exporter Importer

Copy Invoice Stage II Payments

Stage VI

Prepayments Stage III

Statements Stage V

Export Factor Copy Invoices Stage IV Import Factor

Payments Stage VII

Payment of Commission Stage VIII

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FUNCTION OF A FACTOR
 It is purchasing & collection the client’s
a/c’s receivables (with or without
recourse),
 Sales Ledger management
 Credit investigation & undertaking of
risks
 Provision of finance against debts
 Rendering consultancy services

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FACTORING VIS-À-VIS BILL
DISCOUNTING
 Factoring and bill discounting are similar
to the extent that both make available
finance against the a/c receivables held
by client.
 So question ??

what difference between these?

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 DIFFERENCE
Bills discounting factoring

Transaction oriented i.e.each bill Whereas here a pre payement

separately assesed and against all unpaid and not dues
discounted. invoices.

Discounted bill can be It can not be rediscounted.

rediscounted severel times befor
they mature.

Not taking the responsibility of But here it take all responsibility.

sales Léger admintration and
collection of debts.

Its usaualy with recourse to the It can be any of type.

client.

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COST AND BENEFITS OF
FACTORING
 There are two types of cost involve:-
1)The factoring commission or service fees
2)The interest on advance granted by the
factor to the firm
 Factoring has the following benefits:-
1)Instant cash against credit sales
2)Improved cash flow leads to more profit and
growth
3)Improved efficiency

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 Continue..
4)Reduction of current liabilities so
improved in current ratio.
5)More concentrate on manufacturing and
marketing.
6)Helps the firm to save cost of credit
administration due to the scale of
economics and specialization.

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FACTORING IN INDIAN
CONTEXT
 In 1988,factoring service launched by
RBI in India.
 Firstly it is started by SBI and Canara
bank during the year 1991.
 RBI permitted banks to engage in the
factoring business as departmental
services and through their subsidiaries.
 RBI makes it mandatory to get
LOD(letter of disclaimer) before
proceeding for factoring.

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FACTORING COMPANIES IN
INDIA
 Canbank Factors Limited
 SBI Factors and Commercial Services Pvt.
Ltd
 The Hongkong and Shanghai Banking
Corporation Ltd
 Foremost Factors Limited
 Global Trade Finance Limited
 Export Credit Guarantee Corporation of
India Ltd
 Citibank NA, India
 Small Industries Development Bank of
India (SIDBI)
 Standard Chartered Bank
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EXAMPLE OF SBI FACTOR
 SBI factor, a subsidiary of state bank of
India is one of the leading factoring
company in India Established in
feb,1991.
 Primary objective to provide domestic
factoring services to SMEs .
 For design to improve the cash flow
position of SMEs.

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SBI offers
[A] Domestic factoring
 Recourse factor
 Non-recourse factor

[B] Export factoring

 Export factor
 Import factor

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SUPPOSE…
 A small firm has Credit sales:- 80lakh
 Avg collection period:- 80days
 Bad debts loss:-1% of credit sales
 A factor is appointed to by the firm for that
he will receive charge 2%com.and also pay
advance against receivable to the firm at
interest @18% after with holding 10% as a
reserve.
What is annual cost of factoring to the firm?

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Solution;
 Avg level of
receivables=8,00,000*80/360=17,77,778
 Factoring commission=0.02*17,77,778=35,556
 And reserve=0.10*17,77,778=1,77,778

Thus, the amount available for advance

is:=17,77,778(-)35,556(-)1,77,778
=15,64,444
Factor will also deduct 18%int before paying the
advance.
Int=15,64,444*0.18*80/360=62,578
Annual cost of factoring=35,556 +62,578=98134 28
THANK
YOU
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