Post on 08-Apr-2018
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` Started back from period of a Mesopotamian king
Hammurabi.
` Another form of factoring where Romans were selling
promissory notes at a discount.` Began extensive usage in American Colonies.
` Used to supply raw materials to other countries.
` Merchant bankers collected funds in advance from the
customers to pay back to these colonies so that they canstart their irrigation and harvesting work again.
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` Factoring is a financial term wherein a firm discounts its
receivables to a third party in order to generate
immediate cash for the business and continue the same.
` Factoring is a method used by a firm to obtain cash whenthe firm is insufficient to meet the current obligations
and accommodate its other cash needs, such as new
orders or contracts.
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` 3 parties Involved:
` a) Client:- one who supplies
the good on credit.
`
b) Customer:- one whoreceives the goods and
gives the invoice copy back
to the client after signing it.
` c) Factor:- one who makes
the payment of the invoice
copy.
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` In case of Domestic factoring, there are three partiesinvolved: client, customer & the factor.
Customer buys goods from the client & in return client gives the
invoice copy to the customer which the client forwards to the
factor for the payment.
After checking the invoice & the credit worthiness of the
customer, the factor make a prepayment of 80-90 % to the
client.
At the time of maturity, factor sends the statement of payment to
the customer & after checking the same, makes the full paymentto the factor.
Finally upon receipt of full payment from customers, factor
makes the balance payment to client after deducting the
financing cost & operational cost.
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` In case of export financing, there are 4 parties involved:client, customer, correspondent & factor.
The customer places the order with the client & fixes the
prepayment limit with factor.
Client exports the goods to the customer & sends a copy ofinvoice to the factor for collecting the payment.
Factor then sends copy of invoice to the overseas correspondent
& based on the invoice, factor makes prepayment as determined
earlier up to 80/90% to the client.
Customer makes the payment to its overseas correspondent &thereafter revert the payment received, to the factor.
Finally after receiving the full amount, factor makes the balance
20/10% payment after deducting financial & operational cost to
client .
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` Cost related to receivables management & debt collection
reduces.
` Cost related to maintenance of separate receivables/
collection deptt. is removed, thereby saving time.
` Concentration on other functions such as promotion,
advertising, production improves.
` Decreasing the risk of dishonour of a/cs receivables.
` Reduces the burden of availing the other ways of finance as
the firm can get its book debts discounted.
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` Recourse & non-recourse Factoring
` Disclosed & non-disclosed Factoring
` Maturity Factoring
` Domestic & International Factoring
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` Upto 80-90% of the invoice amount is factored.
` Interest is charged from the date of payment till the date of
collection.
` Client undertakes to collect the debts from the customer.
` If the customer do not pays the amount on maturity, factor
will recover the amount from the client.
` Risk rests with client.
` Interest charged is at a nominal percentage.
` Most common practice in India
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` Factor undertakes to collect the payment from the customer.
` Client not liable for the loss of the factoring company if the
customer do not pays.
` As compared to recourse, less amount is factored for the
payment.
` Interest rate is at a higher side.
` Credit risk rests with the factor.
` Common practice in US/UK.
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` Clients customers are notified to the factoring agreement.
` Can be either be recourse or non-recourse.
` Factor may or may not be responsible for the collection of
debts depending upon the type of factoring i.e. recourse or
non-recourse.
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` Clients customers are not notified of the factoring
arrangement.
` Collection of debts are undertaken by the client himself.
` Client has to pay the amount to the factor whether the
customer has paid or not.
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` Factor does not make any advance payment to the client.
` Comprises of full administration of sales ledger, collection
from debtors & protection against bad-debts.
` Paid on guaranteed payment date or on maturity of
receivables.
` No risk to factor.
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` 3 parties are involved: 4 parties are involved:
Customer(Buyer) Exporter (Client)
Client (Seller/Supplier) Importer (Customer)
Factor (Financial Exporter factor
Intermediary) Importer factor
` Carried out in the same Carried out with the
country. foreign country.
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` Started with establishment of SBI Factors & Commercial
Services Pvt. Ltd. In the year 1991.
` Can Factors Ltd., a subsdiary of Canara Bank also formed in
the same year.
` HSBC Factoring
` E.C.G.C. India
` CITI Bank
` Global Trade Finance Ltd.
` Small Industrial Development Bank of India (SIDBI)
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` SBI Factors purchased 91 % stake in Global Trade Finance to
gain a market share of around 75 % in factoring business.
` SMEs with turnover of more than Rs. 5 crores can avail the
facility of factoring from HSBC.
` India with just 8 companies in factoring services generated a
total turnover of Rs. 19,860.5 crore which is much lower than:
` Japans Rs. 4,15,789.1 crore
` Taiwans Rs. 2,23,152. 6 crore and
` Chinas Rs. 7,97,77.1 crore in Asia.
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` Factoring now gaining importance in India slowly with the
increase in customers access to benefits of factoring .
` Indias future in factoring business is expected very good as it
has gown at a very fast rate i.e. 174 % in only 4 years.
` For the success of factoring in in India, government policies
needs to be modified so that more private players can come
forward to start up their factoring business in India .
` Customer awareness about benefits of factoring.
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THANK YOU