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Started back from period of a Mesopotamian king Hammurabi. Another form of factoring where Romans were selling promissory notes at a discount. Began extensive usage in American Colonies. Used to supply raw materials to other countries. Merchant bankers collected funds in advance from the customers to pay back to these colonies so that they can start their irrigation and harvesting work again.

.` ` Factoring is a financial term wherein a firm discounts its receivables to a third party in order to generate immediate cash for the business and continue the same. such as new orders or contracts. Factoring is a method used by a firm to obtain cash when the firm is insufficient to meet the current obligations and accommodate its other cash needs.

one who receives the goods and gives the invoice copy back to the client after signing it. c) who supplies the good on credit. .` ` ` ` 3 parties Involved: a) who makes the payment of the invoice copy. b) Customer:.

makes the full payment to the factor. customer & the factor. factor sends the statement of payment to the customer & after checking the same. Customer buys goods from the client & in return client gives the invoice copy to the customer which the client forwards to the factor for the payment. . the factor make a prepayment of 80-90 % to the client. Finally upon receipt of full payment from customers. there are three parties involved: client. At the time of maturity. factor makes the balance payment to client after deducting the financing cost & operational cost.` In case of Domestic factoring. After checking the invoice & the credit worthiness of the customer.

customer. Finally after receiving the full amount.` In case of export financing. . to the factor. Factor then sends copy of invoice to the overseas correspondent & based on the invoice. factor makes prepayment as determined earlier up to 80/90% to the client. Client exports the goods to the customer & sends a copy of invoice to the factor for collecting the payment. correspondent & factor. The customer places the order with the client & fixes the prepayment limit with factor. Customer makes the payment to its overseas correspondent & thereafter revert the payment received. factor makes the balance 20/10% payment after deducting financial & operational cost to client . there are 4 parties involved: client.

production improves. Reduces the burden of availing the other ways of finance as the firm can get its book debts discounted. is removed. . advertising. Concentration on other functions such as promotion. Cost related to maintenance of separate receivables/ collection deptt. Decreasing the risk of dishonour of a/cs receivables.` ` ` ` ` Cost related to receivables management & debt collection reduces. thereby saving time.

` Recourse & non-recourse Factoring Disclosed & non-disclosed Factoring Maturity Factoring Domestic & International Factoring ` ` ` .

Interest charged is at a nominal percentage. Interest is charged from the date of payment till the date of collection. factor will recover the amount from the client. Client undertakes to collect the debts from the customer. Most common practice in India . If the customer do not pays the amount on maturity.` ` ` ` ` ` ` Upto 80-90% of the invoice amount is factored. Risk rests with client.

As compared to recourse. less amount is factored for the payment. Interest rate is at a higher side. Credit risk rests with the factor. Client not liable for the loss of the factoring company if the customer do not pays. . Common practice in US/UK.` ` ` ` ` ` Factor undertakes to collect the payment from the customer.

Can be either be recourse or non-recourse.e. recourse or non-recourse. Factor may or may not be responsible for the collection of debts depending upon the type of factoring i.` Client s customers are notified to the factoring agreement. ` ` .

` Client s customers are not notified of the factoring arrangement. Collection of debts are undertaken by the client himself. Client has to pay the amount to the factor whether the customer has paid or not. ` ` .

Comprises of full administration of sales ledger. ` ` ` . collection from debtors & protection against bad-debts. Paid on guaranteed payment date or on maturity of receivables. No risk to factor.` Factor does not make any advance payment to the client.

4 parties are involved: Exporter (Client) Importer (Customer) Exporter factor Importer factor Carried out with the foreign country.` 3 parties are involved: Customer(Buyer) Client (Seller/Supplier) Factor (Financial Intermediary) Carried out in the same country. ` .

2. 4. Financial Institution can get the bills re-discounted before they mature for payment. . Bill is separately examined and discounted. Factor has responsibility of sales administration and collection of debts. 5. Financial Institution does not have responsibility of sales administration and collection of debts. Factoring can be done with or without recourse to client. 3.BILL DISCOUNTING FACTORING 1. 4. No notice of assignment provided to customers of the Client. 1. 2. Factor cannot re-discount the receivable taken under advanced factoring arrangement. Bills discounting is usually done with recourse. Notice of assignment is provided to customers of the client. Pre-payment made against all unpaid and not due invoices purchased by Factor. 3. 5.

.` ` ` ` ` ` ` Started with establishment of SBI Factors & Commercial Services Pvt.C. Small Industrial Development Bank of India (SIDBI) . India CITI Bank Global Trade Finance Ltd. a subsdiary of Canara Bank also formed in the same year. HSBC Factoring E. In the year 1991.C. Ltd. Can Factors Ltd.G.


152.97.1 crore in Asia. 2. 6 crore and China s Rs.789. 19. 4.77.` SBI Factors purchased 91 % stake in Global Trade Finance to gain a market share of around 75 % in factoring business. SMEs with turnover of more than Rs.5 crore which is much lower than: ` ` ` ` ` Japan s Rs.1 crore Taiwan s Rs. . 5 crores can avail the facility of factoring from HSBC.15. India with just 8 companies in factoring services generated a total turnover of Rs.860.23. 7.

For the success of factoring in in India. Customer awareness about benefits of factoring.e.` Factoring now gaining importance in India slowly with the increase in customer s access to benefits of factoring . India s future in factoring business is expected very good as it has gown at a very fast rate i. ` ` ` . 174 % in only 4 years. government policies needs to be modified so that more private players can come forward to start up their factoring business in India .