AMITY GLOBAL BUSINESS SCHOOL Chandigarh 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.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh 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.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh 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.
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.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh Factoring means an arrangement between a factor and his client which includes at least two of the following services to be provided by the factor- 1)Finance 2)Maintenance of accounts 3)Collection of debts 4)Protection against credit risk AMITY GLOBAL BUSINESS SCHOOL Chandigarh Factoring Services - Concept 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 clients 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. 3 AMITY GLOBAL BUSINESS SCHOOL Chandigarh Factoring functions.. It is purchasing & collection the clients a/cs receivables (with or without recourse), Sales Ledger management Credit investigation & undertaking of risks Provision of finance against debts Rendering consultancy services 4 AMITY GLOBAL BUSINESS SCHOOL Chandigarh Factoring Services - Concept 5 Client Customer Factor Order placed Deliver of goods Client submits invoice Factor-Prepayment Monthly statements Customer pays AMITY GLOBAL BUSINESS SCHOOL Chandigarh WHY A FIRM USE FACTORING
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. AMITY GLOBAL BUSINESS SCHOOL Chandigarh SERVICES OFFERED BY A FACTOR
a) Follow-up and collection of Receivables from Clients. b) Purchase of Receivables with or without recourse. c) Help in getting information and credit line on customers (credit protection) d) Sorting out disputes , due to his relationship with Buyer & Seller.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh PROCESS INVOLVED IN FACTORING a) Client concludes a credit sale with a customer. b) Client sells the customers account to the Factor and notifies the customer. c) Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance. d) Factor maintains the customers account and follows up for payment. e) Customer remits the amount due to the Factor. f) Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh MECHANICS OF FACTORING a) The Client (Seller) sells goods to the buyer and prepares invoice with a notation that debt due on account of this invoice is assigned to and must be paid to the Factor (Financial Intermediary).
b) The Client (Seller) submits invoice copy only with Delivery Challan showing receipt of goods by buyer, to the Factor.
c) The Factor, after scrutiny of these papers, allows payment (,usually up to 80% of invoice value). The balance is retained as Retention Money (Margin Money). This is also called Factor Reserve.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh a) The drawing limit is adjusted on a continuous basis after taking into account the collection of Factored Debts.
b) Once the invoice is honored by the buyer on due date, the Retention Money credited to the Clients Account.
c) Till the payment of bills, the Factor follows up the payment and sends regular statements to the Client.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh CHARGES FOR FACTORING SERVICES a) Factor charges Commission (as a flat percentage of value of Debts purchased) (0. 5 0% to 1. 5 0%)
b) Commission is collected up-front.
c) For making immediate part payment, interest charged. Interest is higher than rate of interest charged on Working Capital Finance by Banks.
d) If interest is charged up-front, it is called discount.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh TYPES OF FACTORING a) Recourse Factoring.
b) Non-recourse Factoring.
c) Maturity Factoring.
d) Cross-border Factoring.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh RECOURSE FACTORING
a) Up to 75 % to 85 % of the Invoice Receivable is factored. b) Interest is charged from the date of advance to the date of collection. c) Factor purchases Receivables on the condition that loss arising on account of non-recovery will be borne by the Client. d) Credit Risk is with the Client. e) Factor does not participate in the credit sanction process. f) In India, factoring is done with recourse.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh NON-RECOURSE FACTORING 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.
b) Credit risk is with the Factor.
c) Higher commission is charged.
d) Factor participates in credit sanction process and approves credit limit given by the Client to the Customer.
e) In USA/UK, factoring is commonly done without recourse.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh MATURITY FACTORING a) Factor does not make any advance payment to the Client. b) Pays on guaranteed payment date or on collection of Receivables. c) Guaranteed payment date is usually fixed taking into account previous collection experience of the Client. d) Nominal Commission is charged. e) No risk to Factor.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh CROSS - BORDER FACTORING a) It is similar to domestic factoring except that there are four parties, viz., b) a) Exporter, c) b) Export Factor, d) c) Import Factor, and e) d) Importer.
f) It is also called two-factor system of factoring. g) Exporter (Client) enters into factoring arrangement with Export Factor in his country and assigns to him export receivables.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh 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.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh Advantages of Factoring
Factoring provides a large and quick boost to cashflow. there are many factoring companies, so prices are usually competitive it can be a cost-effective way of outsourcing your sales ledger while freeing up your time to manage the business it assists smoother cashflow and financial planning some customers may respect factors and pay more quickly 18 AMITY GLOBAL BUSINESS SCHOOL Chandigarh factors may give you useful information about the credit standing of your customers and they can help you to negotiate better terms with your suppliers factors can prove an excellent strategic - as well as financial - resource when planning business growth you will be protected from bad debts if you choose non-recourse factoring - see the page in this guide on recourse factoring and non- recourse factoring 19 AMITY GLOBAL BUSINESS SCHOOL Chandigarh cash is released as soon as orders are invoiced and is available for capital investment and funding of your next orders factors will credit check your customers and can help your business trade with better quality customers and improved debtor spread
20 AMITY GLOBAL BUSINESS SCHOOL Chandigarh Demerits of Factoring The cost will mean a reduction in your profit margin on each order or service fulfilment. 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. 21 AMITY GLOBAL BUSINESS SCHOOL Chandigarh Some customers may prefer to deal directly with you. How the factor deals with your customers will affect what your customers think of you. Make sure you use a reputable company that will not damage your reputation. You have to pay extra to remove your liability for bad debtors.
22 AMITY GLOBAL BUSINESS SCHOOL Chandigarh FACTORING IN INDIA a) Kalyana Sundaram Committee recommended introduction of factoring in 1989. b) Banking Regulation Act, 1949, was amended in 1991 for Banks setting up factoring services. c) SBI/ Canara Bank have set up their Factoring Subsidiaries:- d) SBI Factors Ltd., (April, 1991) ( an asset base of Rs 1908.00 corers as on March 31, 2008, highest in India) e) Canara Bank Factors Ltd., (August, 1991). f) RBI has permitted Banks to undertake factoring services through subsidiaries.
AMITY GLOBAL BUSINESS SCHOOL Chandigarh Why we need Factoring? For Smooth cash flow
For meeting working capital needs
Overcome the situation from high cost of capital and reduced profit 24 AMITY GLOBAL BUSINESS SCHOOL Chandigarh What is Forfaiting ? Forfait is derived from French word a forfait which means forfeiting or surrender of rights It is a mechanism of financing exports by discounting export receivables evidenced by Bills of Exchange or Promissory Notes without recourse to the seller (viz exporter) carrying medium to long term maturities on a fixed rate basis (discount) upto 100 per cent of the contract value 25 AMITY GLOBAL BUSINESS SCHOOL Chandigarh Forfaiting..
It is a highly flexible technique that allows an Exporter to grant attractive credit terms to foreign Buyers, without tying up cash flow or assuming the risks of possible late payment or default. Simultaneously, the Exporter is fully protected against interest and/or currency rates moving unfavourably during the credit period
Forfaiting is a highly effective sales tool, which simultaneously improves cash-flow and eliminates risk. 26 AMITY GLOBAL BUSINESS SCHOOL Chandigarh Six Parties in Forfaiting 1. Exporter (India) 2. Importer (Abroad) 3. Exporters Bank (India) 4. Importers/Avalising Bank (Abroad) 5. EXIM Bank (India ) 6. Forfaiter (Abroad) 27 AMITY GLOBAL BUSINESS SCHOOL Chandigarh Mechanism 1. The exporter and importer negotiate the proposed export sale contract. Then the exporter approaches the forfaiter to ascertain the terms of forfaiting. 2. The forfaiter collects details about the importer, supply and credit terms, documentation etc. 3. Forfaiter ascertains the country risk and credit risk involved. . 28 AMITY GLOBAL BUSINESS SCHOOL Chandigarh 4. The forfaiter quotes the discount rate. 5. The exporter then quotes a contract price to the overseas buyer by loading the discount rate, commitment fee etc. on the sale price of the goods to be exported. 6. The exporter and forfaiter sign a contract. 7. Export takes place against documents guaranteed by the importers bank. 8. The exporter discounts the bill with the forfaiter and the latter presents the same to the importer for payment on due date or even sell it in secondary market. 29 AMITY GLOBAL BUSINESS SCHOOL Chandigarh Costs of forfaiting The forfaiting transaction has typically three cost elements: 1. Commitment fee, payable by the exporter to the forfaiter for latters commitment to execute a specific forfaiting transaction at a firm discount rate with in a specified time. 2. Discount fee, interest payable by the exporter for the entire period of credit involved and deducted by the forfaiter from the amount paid to the exporter against the availised promissory notes or bills of exchange. 3. Documentation fee. 30 AMITY GLOBAL BUSINESS SCHOOL Chandigarh Benefits of forfaiting 1. It frees the exporter from political or commercial risks from abroad.
2. Forfaiting offers without recourse finance to an exporter. It does not effect the exporters borrowing limits/capacity.
3. Forfaiting relieves the exporter from botheration of credit administration and collection problems. AMITY GLOBAL BUSINESS SCHOOL Chandigarh 4. Forfeiting is specific to a transaction. It does not require long term banking relationship with forfeiter.
5. Exporter saves money on insurance costs because forfeiting eliminates the need for export credit insurance. 32 AMITY GLOBAL BUSINESS SCHOOL Chandigarh Benefits to Exporters Converts a Deferred Payment export into a cash transaction, improves liquidity Frees Exporter from cross-border political or commercial risks associated Finances upto 100 percent of export value It is a Without Recourse finance Hedges against Interest and Exchange Risks
33 AMITY GLOBAL BUSINESS SCHOOL Chandigarh FACTORING vs. FORFAITING POINTS OF DIFFERENCE FACTORING FORFAITING Extent of Finance Usually 75 80% of the value of the invoice 100% of Invoice value Credit Worthiness Factor does the credit rating in case of non- recourse factoring transaction The Forfaiting Bank relies on the creditability of the Avalling Bank. Services provided Day-to-day administration of sales and other allied services No services are provided Recourse With or without recourse Always without recourse Sales By Turnover By Bills AMITY GLOBAL BUSINESS SCHOOL Chandigarh DIFFERENCE BETWEEN FACTORING AND FORFAITING 1.Suitable for ongoing open account sales, not backed by LC or accepted bills or exchange. 2. Usually provides financing for short-term credit period of upto 180 days. 1. Oriented towards single transactions backed by LC or bank guarantee. 2. Financing is usually for medium to long-term credit periods from 180 days upto 7 years though shorterm credit of 30180 days is also available for large transactions. 35 AMITY GLOBAL BUSINESS SCHOOL Chandigarh DIFFERENCE BETWEEN FACTORING AND FORFAITING 3.Requires a continuous arrangements between factor and client, whereby all sales are routed through the factor. 4. Factor assumes responsibility for collection, helps client to reduce his own overheads. 3. Seller need not route or commit other business to the forfaiter. Deals are concluded transaction-wise.
4. Forfaiters responsibility extends to collection of forfeited debt only. Existing financing lines remains unaffected. 36 AMITY GLOBAL BUSINESS SCHOOL Chandigarh DIFFERENCE BETWEEN FACTORING AND FORFAITING 5. Separate charges are applied for financing collection administration credit protection and provision of information. 5. Single discount charges is applied which depend on guaranteeing bank and country risk, credit period involved and currency of debt. Only additional charges is commitment fee, if firm commitment is required prior to draw down during delivery period. 37 AMITY GLOBAL BUSINESS SCHOOL Chandigarh DIFFERENCE BETWEEN FACTORING AND FORFAITING 6. Service is available for domestic and export receivables. 7. Financing can be with or without recourse; the credit protection collection and administration services may also be provided without financing. 6. Usually available for export receivables only denominated in any freely convertible currency. 7. It is always without recourse and essentially a financing product. 38 AMITY GLOBAL BUSINESS SCHOOL Chandigarh List of some Forfaiters Standard Bank, London Hong Kong Bank Indo Aval ABN AMRO Bank Meghraj Financial Services 39