Factoring : Factoring Sunitha.B.K
Jain University 1 Factoring : Factoring The word “Factor” has been derived from the Latin word “Facere” which means “to make or to do” Factoring : Factoring ‘Factor’ is an agent, as a banking or insurance company, engaged in financing the operations of certain of certain companies or in financing wholesale or retail trade sales, through the purchase of account receivables.
- Webster Dictionary 3 Factoring : Factoring Factoring is a method of financing whereby a company sells its trade debts at a discount to financial institution.
Factoring is a continuous arrangement between a financial institution , (namely the factor) and a company (namely the client) which sells goods and services to trade customers on credit 4 Factoring : Factoring As per this arrangement , the factor purchases the client’s trade debts including accounts receivebles either with or without recourse to the client and thus exercises control over the credit extended to the customers and administers the sales ledger of his client 5 Factoring : Factoring Factoring is a fund-based financial product.
It involves three parties:
the seller of goods
the buyer of goods
the factoring agent. 6 Different kinds of factoring services : Different kinds of factoring services Basically there are three parties to the factoring services as depicted below: 7 Client customer factor Buyer Seller Financer Definition of Factoring : Definition of Factoring “ Factoring is a service of financial nature involving the conversion of credit bills into cash”
“ Factoring is a service involving the purchase by a financial organisation, called a factor, of receivables owned to manufacturers and distributors by their customers, which the factor assuming full credit and collection responsibilities
ROBERT.W.JOHNSON 8 MODUS OPERANDI OF FACTORING : MODUS OPERANDI OF FACTORING 9 Slide 10: 10 MODUS OPERANDI OF FACTORING : MODUS OPERANDI OF FACTORING There should be a factoring arrangement (Invoice purchase arrangement) between the client (which sells goods and services to trade customers on credit) and the factor, which is the financing organisation
Whenever the client sells goods to trade customers on credit , he prepares invoices in the usual way 11 MODUS OPERANDI OF FACTORING : MODUS OPERANDI OF FACTORING The goods are sent to the buyers without raising a bill of exchange but accompanied by an invoice.
The debt due by the purchaser to the client is assigned to the factor by advising the trade customers, to pay the amount due to the client to the factor 12 MODUS OPERANDI OF FACTORING : MODUS OPERANDI OF FACTORING The client hands over the invoices to the factor under cover of a schedule of offer along with the copies of invoices and receipted delivery challans
The factor makes an immediate payment upto 80% of the assigned invoices and balance 20% will be paid on realization of the debt 13 TERMS & CONDITIONS OF FACTORING : TERMS & CONDITIONS OF FACTORING The existence of an agreement between the factor and the client is central to the function of factoring 14 TERMS & CONDITIONS OF FACTORING : TERMS & CONDITIONS OF FACTORING Assignment of debt in favour of the factor
Selling limits for the client
Conditions within which the factor will have recourse to the client in case of non-payment by the trade customer.
Circumstances under which the factor will have recourse in case of non-payment 15 TERMS & CONDITIONS OF FACTORING : TERMS & CONDITIONS OF FACTORING Details regarding the payment to the factor for his services, say for instance as a certain percentage on turnover.
Interest to be allowed to the factor on the account where credit has been sanctioned to the supplier
Limit of any overdraft facility and rate of interest to be charged by the factor 16 FUNCTIONS OF FACTORING : FUNCTIONS OF FACTORING Purchase and Collection of Debts
Sales Ledger Management
Credit Investigation and Undertaking of Credit Risk
Provision of Finance against Debts
Rendering Consultancy Services 17 Characteristics of Factoring : Characteristics of Factoring Usually the period for factoring is 90 to 150 days. Some factoring companies allow even more than 150 days.
Factoring is considered to be a costly source of finance compared to other sources of short term borrowings.
Factoring receivables is an ideal financial solution for new and emerging firms without strong financials. This is because credit worthiness is evaluated based on the financial strength of the customer (debtor). Hence these companies can leverage on the financial strength of their customers. 18 Characteristics of Factoring : Characteristics of Factoring Bad debts will not be considered for factoring.
Credit rating is not mandatory. But the factoring companies usually carry out credit risk analysis before entering into the agreement.
For delayed payments beyond the approved credit period, penal charge of around 1-2% per month over and above the normal cost is charged (it varies like 1% for the first month and 2% afterwards). 19 Characteristics of Factoring : Characteristics of Factoring Bad debts will not be considered for factoring.
Credit rating is not mandatory. But the factoring companies usually carry out credit risk analysis before entering into the agreement.
Indian firms offer factoring for invoices as low as 1000Rs 20 TYPES OF FACTORING : TYPES OF FACTORING FULL SERVICE FACTORING or WITHOUT RECOURSE FACTORING
WITH RECOURSE FACTORING
INTERNATIONAL FACTORING 21 TYPES OF FACTORING : TYPES OF FACTORING SUPPLIERS GUARANTEE FACTORING
BUYER BASED FACTORING
SELLER BASED FACTORING 22 FULL SERVICE FACTORING OR WITHOUT RECOURSE FACTORING : FULL SERVICE FACTORING OR WITHOUT RECOURSE FACTORING Here a factor provides finance, administers the sales ledger, collects the debts at his risk and renders consultancy service.
If the debtors fail to repay the debts, the entire responsibility falls on the shoulders of the factor since he assumes the credit risk also.
He cannot pass this responsibility to his client and hence this type of Factoring is also called as
WITHOUT RECOURSE FACTORING 23 WITH RECOURSE FACTORING : WITH RECOURSE FACTORING Under this type , the factor does not assume the credit risk.
If the debtors do not repay their dues in time & if their debts are outstanding beyond a fixed period, say 60 to 90 Days fro the due date are automatically assigned back to the client 24 WITH RECOURSE FACTORING : WITH RECOURSE FACTORING The client has to take up the work of collection of overdue account by himself. If the client wants the factor to go with the collection work of overdue accounts the client has to pay extra charges called “ REFACTORING CHARGES” 25 MATURITY FACTORING : MATURITY FACTORING Here, the factor does not provide immediate cash payment to the client at the time of assignment of debts.
He undertakes to pay cash as & when collections are made fro the debtors. The entire amount collected less factoring fees is paid to the client immediately. Hence, it is also called “Collection Factoring”
Here no financing is involved. But all other services are available 26 BULK FACTORING : BULK FACTORING Here the factor provides finance after disclosing the fact of assignment of debts to the debtors concerned. This type of factoring is resorted to when the factor is not fully satisfied with the financial condition of the client.
The work relating to sales ledger administration, Credit Control, Collection work etc., has to be done by the client himself 27 BULK FACTORING : BULK FACTORING Since the notification has been made, the factor simply collects the debts on behalf of the client. This is otherwise called as “Disclosed Factoring” or “Notified Factoring” 28 INVOICE FACTORING : INVOICE FACTORING Here , the factor simply provides finance against invoices without undertaking any other functions
All works connected with sales administration, collection of dues etc. Have to be done by the client himself. 29 INVOICE FACTORING : INVOICE FACTORING The debtors are not at all notified & hence they are not aware of the financing arrangement. This type of factoring is confidential in nature and hence it is called as “ Disclosed Factoring” or “Notified Factoring” . 30 AGENCY FACTORING : AGENCY FACTORING Here, the factor & the client share the work between themselves as follows :
The client has to look after the sales ledger administration & collection work
The factor has to provide finance & assume the credit risk 31 INTERNATIONAL FACTORING : INTERNATIONAL FACTORING Here the services of a factor in a domestic business are simply extended to international business.
Factoring is done purely on the basis of the invoice prepared by the exporter. Thus, the exporter is able to get immediate cash to the extent of 80% of the export invoice under international factoring
International Factoring is facilitated with the help of export & import factors 32 SUPPLIERS GUARANTEE FACTORING : SUPPLIERS GUARANTEE FACTORING It is suitable for business establishment which sell goods through middlemen.
In such cases, the factor guarantees the supplier of the goods against invoices raised by the supplier upon another supplier. The bills are assigned in favour of the factor whom guarantees payment of those bills. This enables the supplier to earn profits without much financial involvement 33 LIMITED FACTORING : LIMITED FACTORING Here, the factor does not take up all the invoices of a client. He discounts only selected invoices on merit basis & converts credit bills into cash in respect of those bills only 34 BUYER BASED FACTORING : BUYER BASED FACTORING In most case, the factor is acting as an agent of the seller. But under this type, the buyer approaches a factor to discount his bills. Thus the initiative for factoring comes from the buyer’s end.
The approved buyers of a company approach a factor for discounting their bills to the company in question. 35 BUYER BASED FACTORING : BUYER BASED FACTORING In such a case, the claims on such buyers are paid by discounting the bills without recourse to the seller & the seller also gets ready cash.
This facility is available only reputed credit worthy buyers & hence it is called Selected “BUYER BASED FACTORING” 36 SELLER BASED FACTORING : SELLER BASED FACTORING Here, the seller, instead of discounting his bills, sells all his accounts receivables to the factor, after invoicing the customers.
The sellers job is over as soon as he prepares the invoices.
Thereafter, all the documents connected with the sale are handle over to the factor who takes over the remaining function.
This facility is extended to reputed & credit worthy sellers & hence it is also called “SELLER BASED FACTORING” 37 Factoring Vs Discounting : Factoring Vs Discounting Factoring covers the entire trade debts of a client. Whereas discounting covers only those trade debts which are backed by accounts receivables
Under Factoring, the factor purchases the trade debt & thus becomes a holder for value. Under discounting the financier acts simply as an agent of his customer & he does not become the owner 38 Factoring Vs Discounting : Factoring Vs Discounting The Factors may extend credit without any recourse to the client in the event of non-payment by customers. But, discounting is always made with recourse to the client
Account receivables under discount are subject to rediscounting whereas it is not possible under Factoring 39 Factoring Vs Discounting : Factoring Vs Discounting Factoring involves purchase and collection of debts, management of sales ledger, assumption of credit risk, provision of finance & rendering of consultancy services
But under undisclosed Factoring everything is kept highly confidental 40 Factoring Vs Discounting : Factoring Vs Discounting Bill financing through discounting requires registration of charges with the registrar of Companies. In fact , Factoring does not require such registration.
Discounting is always a kind of “in-Balance sheet financing” that is both the amount of receivables & bank credit are shown in the balance sheet itself due to its with recourse ‘nature But, Factoring is always “Off-Balance Sheet Financing” 41 Benefits of Factoring : Benefits of Factoring Financial Service
‘Credit Risk’ Service
Provision of Expertised “Sales Ledger Management” Service
Consultancy Service 42 Benefits of Factoring : Benefits of Factoring Economy in Servicing
Off –Balance Sheet Financing
Miscellaneous Service 43 Slide 44: 44 Factoring companies in India : Factoring companies in India SBI Factors and Commercial Services Pvt. Ltd – March 1991 with paid up of Rs 25 crores.
Can bank Factors Limited – August 1991 with paid up of Rs 10 crores was contributed by Canara Bank, Andhra Bank and SIDBI 45 Factoring companies in India : Factoring companies in India Fair Growth Factors – First Private Sector Company in April 1992 with paid up of Rs 5 crores.
Foremost Factors Limited – 1997 – Joint venture between the Mohan Exports and the Nations Bank Overseas Corporation(USA), 20th Century Finance Corporation and the ICDs group 46 Slide 47: Global Trade Finance Limited -September 2001, as a joint venture promoted by Export Import Bank of India (Exim Bank); West LB, Germany; and IFC, Washington (the private sector arm of World Bank). 47 Factoring companies in India : Factoring companies in India The Hong Kong and Shanghai Banking Corporation Ltd
Export Credit Guarantee Corporation of India Ltd
Citibank NA, India
Small Industries Development Bank of India (SIDBI) 48