Presented to :T.

D SINGH

PRESENTED BY-

VINEETA DHANWANI & PRIYA SAHNI

Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business.

A study group appointed

INTERNATIONAL INSTITUTE for the Unification of Private Law (UNIDROIT) ROME 1988 defines:factoring means an arrangement between a factor and his client which includes at least two of the following services to be provided by the factor1) Finance 2) Maintenance of accounts 3) Collection of debts 4) Protection against credit risk

 Factoring

is used by a firm when the available Cash Balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs, such as new orders or contracts.

For Smooth cash flow

For meeting working capital needs Overcome the situation from high cost of capital and reduced profit

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Buyer Client customer

collectio n

factor

a) b) c)

d)

Follow-up and collection of Receivables from Clients. Purchase of Receivables with or without recourse. Help in getting information and credit line on customers (credit protection) Sorting out disputes , due to his relationship with Buyer & Seller.

 It

is purchasing & collection the clients a/cs receivables (with or without recourse), Ledger management

Sales

Credit

investigation & undertaking of risks of finance against debts

Provision

Rendering

consultancy services

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Deliver of goods Client Order placed Customer

Client submits invoice

Customer pays
Factor-Prepayment Monthly statements Factor

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 Fax

the copy of invoice to factor Factor processes the invoice Get up to 80% of the invoice in 24 hours 20% kept in reserve account Factor receives the payment from customer Factor deducts fee from reserve account Factor forwards the balance from reserve

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a)
b)

Recourse Factoring.
Non-recourse Factoring.

c)
d)

Maturity Factoring.
Cross-border Factoring.

a) b) c)

d)
e)

f)

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. Credit Risk is with the Client. Factor does not participate in the credit sanction process. In India, factoring is done with recourse.

 Financial

Services Collection Service Credit Risk Service Provision of expertise sales ledger management service Consultancy service Economy in Servicing Off-balance sheet financing Trade Benefits Miscellaneous service
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a)

Factor 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.

b) c) d)

e)

a)

b)

c)

d) e)

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 charged. No risk to Factor.

a)

b) c) d) e)

It is similar to domestic factoring except that there are four parties, viz., a) Exporter, b) Export Factor, c) Import Factor, and d) 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.

f) g)

It

may reduce the scope for other borrowing book debts will not be available as security. Factors will restrict funding against poor quality debtors or poor debtor spread, so you will need to manage these funding fluctuations. It may be difficult to end an arrangement with a factor as you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet.

Some

customers may prefer to deal directly with

you. The cost will mean a reduction in your profit margin on each order or service fulfillment. How the factor deals with your customers will affect what your customers think of you.

a)
b) c)

d) e) f) g)

Transportation Medical Janitorial(the maintenance or cleaning of a building) Staffing Construction Manufacturing Service

a)
b)

Banks reluctance to provide factoring services

Banks resistance to issue Letter of Disclaimer (Letter of Disclaimer is mandatory as per RBI Guidelines). Problems in recovery. Factoring requires assignment of debt which attracts Stamp Duty. Cost of transaction becomes high.

c) d)

e)

 Financial

Services Collection Service Credit Risk Service Provision of expertise sales ledger management service Consultancy service Economy in Servicing Off-balance sheet financing Trade Benefits Miscellaneous service
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