FACTORING - Amit Sethi

8/7/2019 FACTORING - Amit Sethi

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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

FACTORING - Amit Sethi

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