FACTORING & Forefaiting

DISCOUNTING
FACTORING AND FORFAITING

Factoring is of recent origin in Indian Context.

Kalyana Sundaram Committee recommended introduction of

factoring in 1989.

Banking Regulation Act, 1949, was amended in 1991 for Banks

setting up factoring services.

SBI/Canara Bank have set up their Factoring Subsidiaries:-

 SBI Factors Ltd., (April, 1991)
 CanBank Factors Ltd., (August, 1991).

RBI has permitted Banks to undertake factoring services

through subsidiaries.
Factoring
 Factoring is defined as an asset-based
means of financing by which the factor
buys up the book debts of a company on a
regular basis, paying cash down against
receivables, and then collects the amounts
from the customers to whom the company
has supplied goods.
WHAT IS FACTORING ?
Normally, the Factor makes a part payment (usually upto 80%)
immediately after the debts are purchased thereby providing
immediate liquidity to the Client.

PROCESS OF FACTORING

CLIENT CUSTOMER

FACTOR
6
 PROCESS INVOLVED IN
FACTORING
•Customer places an order with the client for goods and/or services on credit
Client concludes a credit sale with a customer.
•Client Delivers the goods and invoice with a notice to pay to the factor.

•Client sells the customer’s account to the Factor and notifies the customer.

•Factor makes part payment (advance) against account purchased say 80-90
per cent of the invoice value on the production of a copy of invoice, after
adjusting for commission and interest on the advance.

•Factor maintains the customer’s account and follows up for payment.

• Customer remits the amount due to the Factor.

• Factor makes the final payment to the Client when the account is collected
or on the guaranteed payment date.
TYPES OF FACTORING
SERVICES
1) Full Servicing Factoring: This is also known as without recourse factoring
service. It is the most comprehensive type of factoring arrangement
offering all types of services, namely:
 (a) Finance,
 (b) Sales ledger administration,
 (c) Collection,
 (d) Debt protection,
 (e) Advisory services.
 The most important characteristic of this type of factoring service is
that it gives protection against bad debts to the client.
 In other words, in case the customer fails to pay, the factor will absorb
the losses arising from insolvency or bankruptcy of the client’s
customers.
 High commission is charged

2) Recourse Factoring: Used in India

 In such a type of factoring arrangement, the factor provides all types of
facilities except debt protection.
 That means, in other words, the client is responsible for any bad debts
arising from insolvency of the client’s customers.
Discounting of Bill
 Bill financing is considered to be an appropriate form of
financing trade and business.
 Under this form of financing, seller of the goods draw a bill
of exchange on the buyer (who accepts and returns the
same to the drawer).
 Subsequently seller of the goods discounts the bill of
exchange with bank or finance company and avail the
finance accordingly.
 Only those bills which arise out of genuine trade
transactions are considered by the banks and finance
companies for discounting purpose.
 FACTORING vs
BILLS DISCOUNTING
BILL DISCOUNTING FACTORING
• Finance alone is provided. • Factor has responsibility of Sales Ledger
Administration and collection of Debts.
• Advance is made against receivables
• Advance is made against bills
• With or without recourse
• Always with recourse
• Factor cannot re-discount the receivable
• Financial Institution can get the purchased
bills re-discounted before they
mature for payment.
 FORFAITING


“Forfait” is derived from French word ‘A Forfait’ which means
surrender of rights


It is discounting of international trade receivable on a non-
recourse basis.


Forefaiting is a mechanism by which the right for export
receivables of an exporter (Client) is purchased by a Financial
Intermediary (Forfaiter) without recourse to him.
 COMPARATIVE ANALYSIS
BILLS FACTORING FORFAITING
DISCOUNTED
1. Scrutiny Individual Sale Service of Sale Individual Sale
Transaction Transaction Transaction
2. Extent of Upto 75 – 80% Upto 80% Upto 100%
Finance
3. Recourse With Recourse With or Without
Without Recourse
Recourse
4. Sales Not Done Done Not Done
Administration
5. Term Short Term Short Term Medium Term