4A-Factoring and ing

8/8/2019 4A-Factoring and ing

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Factor

ClientCustomer

Pays the amount (In recourse type customer

pays through client)

credit sale of goods

Invoice

Submit invoice copy

Payment up to 80%

initially

Pays the balance

amount


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FactoringDefinition:y Factoring is defined as a continuing legal

rela

tionship betweena

fina

nc

ia

l institution (thefactor) and a business concern (the client), sellinggoods or providing services to trade customers (thecustomers) on open account basis whereby theFactor purchases the clients book debts (accounts

rec

eiva

bles) either with or without rec

ourse to theclient and in relation thereto controls the creditextended to customers and administers the salesledgers.


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Explanationy It is the outright purchase of credit approved

accounts receivables with the factor assuming bad

debt losses.y Factoring provides sales accounting service, use of

finance and protection against bad debts.

y Factoring is a process of invoice discounting bywhich a capital market agency purchases all tradedebts and offers resources against them.


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Evolution of factoringy The term factor has its origin from the Latin word,

Facere meaning to get things done. The

dictionary defines a factor as an agent particularlya mercantile agent. Factoring has a longfascinating history which traces back throughseveral centuries.

y In the early stages factors were itinerant merchantswho were entrusted with merchandise belongingto others.


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Different kinds of factoring servicesDebt administration:

y The factor manages the sales ledger of the client

company. The client will be sa ved of theadministrative cost of book keeping, invoicing, creditcontrol and debt collection. The factor uses hiscomputer system to render the sales ledgeradministr

ation servi

ces.


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Different kinds of factoring servicesy Credit Information: Factors provide credit

intelligence to their client and supply periodicinformation with various customer-wise analysis.

y Credit Protection: Some f actors also insureagainst bad debts and provide without recoursefinancing.

y Invoice Discounting or Financing : Factors

advance 75% to 80% against the invoice of theirclients. The clients mark a copy of the invoice tothe factors as and when they raise the invoice ontheir customers.


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Services rendered by factory Factor ev aluates creditworthiness of the

customer (buyer of goods)

y Factor fixes limits for the client (seller) which isan aggregation of the limits fixed for each of thecustomer (buyer).

y Client sells goods/services.

y Client assigns the debt in favor of the Factory Client notifies on the invoice a direction to the

customer to pay the invoice value to the Factor.


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Services rendered by factory Client forwards invoice/copy to Factor along with

receipted deliverychallans.y Factor provides credit to client to the extent of

80% of the invoice value and also notifies to thecustomery Factor periodically follows with the customery When the customer pa ys the amount of the

invoice the balance of 20% of the invoice value ispassed to the client recovering necessary interestand other charges.

y If the customer does not pa y, the factor takesrecourse to the client.


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Benefits of factoringy The client will be relieved of the work relating to

sales ledger administration and debt collection

y The client can therefore concentrate more on

planning, production and sales.y The charges paid to a factor which will be

marginally high at 1 to 1.5% than the bankcharges will be more than compensated by

reductions in administrative expenditure.y This will also improve the current ratio of the

client and consequently his credit rating.


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Benefits of factoringy The subsidiaries of the various banks ha ve been

rendering the factoring services.

yThe factoring service is more comprehensive in naturethan the book debt or receivable financing by thebankers.


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Forfaitingy The forfaiting owes its origin to a French term

forfait which means to forfeit (or surrender) onesrights on something to some one else.

y Under this mode of export finance, the exporterforfaits his rights to the future receivables and theforfaiter loses recourse to the exporter in the event ofnon-payment by the importer.


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Methodologyy It is a trade finance extended by a forfaiter to an

exporter/seller for an export/sale transaction involvingdeferred payment terms over a long period at a firm rate

of discount.y Forfaiting is generally extended for export of capital

goods, commodities and services where the importerinsists on supplies on credit terms.


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Methodologyy The exporter has recourse to forfaiting usually in

cases where the credit is extended for long

durations but there is no prohibition for extendingthe facility where the credits are maturing inperiods less than one year.

y Credits for commodities or consumer goods is

generally for shorter duration within one year.Forfaiting services are extended in such cases aswell.


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Mechanism

y There are five parties in a transaction offorfaiting. These are :

1. Exporter2. Exporters bank

3. Importer

4. Importers bank and

5. Forfaiter


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Mechanismy The exporter and importer negotiate the

proposed export sale contract. These are thepreliminarydiscussions.

y Based on these discussions the exporterapproaches the forfaiter to ascertain the termsfor forfeiting.

y The forfaiter collects from exporter all therelevant details of the proposed transaction,

viz., details

about the importer, supply

andcredit terms, documentation, etc., in order to

ascertain the country risk and credit riskinvolved in the transaction..


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Mechanism

y Depending upon the nature and extent of theserisks the forfaiter quotes the discount rate.

y The exporter has now to take care that the

discount rate is reasonable and would beacceptable to his buyer.

y He will then quote a contract price to theoverseas buyer by loading the discount rate,commitment fee, etc., on the sale price of thegoods to be exported.

y If the deals go through, the exporter andforfaiter sign a contract.


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Mechanism

y Export takes place against documents guaranteed bythe importers bank.

y The exporter discounts the bill with the forfaiter andthe forfaiter presents the same to the importer forpayment on due date or even can sell it in secondarymarket.


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Documentation and cost

y Forfaiting transaction is usuallycovered either bya promissory note or bill of exchange. In eithercase it has to be guaranteed bya bank or, bill of

exchange may be avalled by the importer bank.y The Aval is an endorsement made on bill of

exchange or promissory note by the guaranteeingbank by writing per aval on these documents

under proper authentication.y The forfeiting cost for a transaction will be in the

form of commitment fee, discount fee anddocumentation fee.


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Mechanism- a case

y Export-Import Bank ofIndia, (EXIM Bank) has startedwith a scheme to the Indian exporters by working outan intermediary between the exporter and the forfaiter.

y The scheme takes place in the following stages:1. Negotiations being between exporter and importer with

regard to contract price, period of credit, rate ofinterest, etc.

2. Exporter approaches EXIM Bank with all the relevantdetails for an indicative discount quote.

3.EXIM Bank approaches an overseas forfaiter, obtain thequote and gets back to exporter with the offer.


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Mechanism- a case

4.Exporter and importer finalise the term ofcontract. All costs levied by a forfaiter are to betransferred to the overseas buyer. As such discount

and other charges are loaded in the basic contractvalue.

5.Exporter approaches EXIM Bank and it in turn theforfaiter for the firm quote. The exporter confirmthe acceptance of the arrangement.

6. Export takes place shipping documentsalong with bill of exchange, promissory note haveto be in the prescribed format.


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Mechanism- a case

7.Importers bank delivers shipping documents toimporter against acceptance of bill of exchange oron receipt of promissory note from the importer asthe case may be and send these to exporters bankwith its guarantee.

8. Exporters bank gets bill of exchange/promissory note endorsed with thewords Without Recourse from the exporter andpresent the document(s) to EXIM Bank who inturn send it to the forfaiter.


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Mechanism- a case

9. Forfaiter discounts the documents at the pre-determined rate and passes on funds to EXIMBank for onward disbursement to exporters bank

nostro account of exporters bank.10.Exporters bank credits the amount to the

exporter.11.Forfaiter presents the documents on due date to

the importers bank

and re

ceives the dues.12.Importers bank recovers the amount from the

importer.


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DIFFERENCEBETWEEN FACTORING AND

FORFAITING1.Suitable for ongoing open

account sales, not backedby LC or accepted bills or

exchange.

2.Usually provides financingfor short-term creditperiod of upto 180 days.

1. Oriented towards singletransactions backed by LCor bank guarantee.

2. Financing is usually formedium to long-termcredit periods from 180da ys upto 7 years though

shorterm credit of 30180da ys is also available forlarge transactions.


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FORFAITING3.Requires a continuous

arrangements betweenfactor and client, whereby

all sales are routed throughthe factor.

4. Factor assumesresponsibility forcollection, helps client to

reduce his own overheads.

3. Seller need not route orcommit other business tothe forfaiter. Deals are

concluded transaction-wise.

4. Forfaiters responsibilityextends to collection offorfeited debt only.

Existing financing linesremains unaffected.


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FORFAITING5. Separate charges are

applied for financing

collection administration credit protection and

provision of information.

5. Single discount charges isapplied which depend on guaranteeing bank andcountry risk, credit period involved

and currency of debt.Only additional charges is

commitment fee, if firmcommitment is requiredprior to draw down duringdelivery period.


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FORFAITING6. Service is available for

domestic and exportreceivables.

7.Financing can be with or without recourse; thecredit protectioncollection andadministr

ation servi

cesmay also be provided

without financing.

6. Usually available forexport receivables onlydenominated in any

freely convertiblecurrency.

7.It is alwa ys withoutrecourse and essentiallya

finan

cing produ

ct.


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FORFAITING8. Usually no restriction on

minimum size of transactions that can be

covered by factoring .9. Factor can assist with

completing importformalities in the buyerscountry and provide

ongoing contract withbuyers.

8. Transactions should be ofa minimum value of USD250,000.

9.Forfaiting will accept onlyclean documentation inconformity with allregulations in theexporting/importing

countries

4A-Factoring and ing

Documents

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