NATIONAL P.G.

COLLEGE
FINANCIAL SERVICES (502)
TOPIC – FACTORING

SUBMITTED BY : ARPITA TRIVEDI

STUDENT ID: 919014
 Factor has been derived from
Latin word “Facere” meaning Factoring……
to make or to get things done

• Factoring as a fund based financial service, provide resources to finance

receivables as well as facilitates the collection of receivables.
• Factoring may broadly defined as the relationship, created by an agreement,
between seller of goods/ services and a financial institution called the factor.
• Although such services constitute a critical segment of the financial services
scenario in the advanced countries, they appeared on the Indian financial scene
only in the early nineties as a result of RBI initiatives.
 TYPES OF FACTORING

NON-RECOURSE FACTORING
Factoring purchases receivables on the condition that the Factor has
no recourse to the client, if the debt turns out to be non recoverable.
Credit risk is with the Factor.
Higher commission is charged.
Factor participates in credit sanction process and approves credit
limit given by the client to the customer.
In USA/UK, factoring is commonly done without recourse.
 RECOURSE FACTORING

Up to 75% to 85% of the Invoice Receivable is factored.

Interest is charged from the date of advance to the date of
collection.
Factor purchases receivables on the condition that loss
arising on account of non- recovery will be borne by the
client ( seller firm)
Credit risk is with the client.
Factor does not participate in the credit sanction process.
In INDIA, factoring is done with recourse.
 MATURITY FACTORING

Factor does not make any advance payment to the

client.
Pays on guaranteed payment date or on collection of
Receivables.
Guaranteed payment date is usually fixed taking
into account previous collection experience of the
client.
Nominal commission is changed.
No risk to factor.
 CROSS- BORDER FACTORING

 It is similar to domestic factoring except that there are 4

parties:
1. Exporter
2. Export factor
3. Import factor
4. Importer
 It is also called two factor system of factoring.
 Exporter (client) enters into factoring arrangement with
export factor in his country and assigns to him export
receivables.
Export factor enters into arrangement with import factor and
has arrangement for credit evaluation & collection of payment
for an agreed fee.
Notation is made on the invoice that importer has to make
payment to the import factor.
Import factor collects payment and remits to export factor who
passes on the proceeds to the exporter after adjusting his
advance, if any.
Where foreign currency is involved, factor covers exchange
risk also.
 FACTORING COMPANIES IN
INDIA

 GLOBAL
 Canbank TRADE
 SBI FACTORS
factors FINANCE
AND
limited LTD.
COMMERCIAL
SERVICES PVT.
 THE HONG LTD.
KONG AND  FOREMOST
 EXPORT CREDIT
SHANGHAI
BANKING
GUARANTEE FACTORS LTD.
CORPORATION
CORPORATION
OF INDIA LTD.
LTD.
Process Involved In Factoring
customer
Client conclude a credit sale with a customer. Client
Client sells the customer’s account to the factor and notifies
the customer.
Factor makes part payment (advance) against account purchased,
after adjusting for commission and interest on the advance.
Factor maintains the customer’s account and follows up for
Factor
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.
 FACTORING IMPORTANCE

IMMEDIATE INCREASE IN CASH

LESS COSTLY: It reduces the financial
FLOW: As client does not wait for the
burden on the client . It enables the
credit time period as he receives money
client to invest somewhere else.
immediately from the factor.

INVOICE PROCESSING : It relieves the SOURCE OF FINANCE : Itaccelerates the

factor from the task of mailing, posting, turnover of receivables , results in higher
deposit of cheque etc. sales and return on investment.
 UTILITY OF FACTORING

MAINTENANCE OF SALES LEDGER :

CREDIT RISK : Factor company takes ledger of all debtors is maintained by
the risk of default i.e. risk of non factor. An open account method is
payment. adopted and factors prepares periodic
reports for client.

COLLECTION OF RECEIVABLES :It

FINANCING OF TRADE DEBT : Factor
is the responsibility of factor. Factor
provides up to 80% of the cost of goods
has trained manpower & well
sold in advance which reduces financial
equipped infrastructure, proper
burden on client .
strategies are made for this purpose.
Thank you !!