Factoring Final Ppt (Dhrumil)

FACTORINGAND

FORFAITINGPREPARED BY::- DHRUMIL BHATT JAY SHAH JAYMIN PATEL KAUSHAL POTHIVALA

L.J.INSTITUTE OF ENGINEERING &TECHNOLOGY

What is Factoring? :

FACTORING is a “continuing arrangement” between a financial institution (the factor) and a business concern (the client) selling goods or services to trade customers (the customer) whereby the factor purchases the client’s accounts receivables/book debts

What is Factoring? Cont……

Alternatively factoring is a collection and financial service where by receivables are purchased by the factor and credit sales are converted into cash sales

What is Factoring? Cont…

Factoring is a powerful financial instrument specially designed to meet the post sales working capital requirements of the Industrial, Trade & Service sectors It is a portfolio of complementary financial services

What is Factoring? Cont…

Factoring is a financial option for the management of receivables In simple definition, it is the conversion of credit sales into cash.

In factoring, a financial institution (factor) buys the accounts receivable of a company (client) and pays up to 80% ( rarely up to 90%) of the bill amount Collection of debt is done either by the factor or the client depending upon the type of factoring

Factoring Services - Concept

Factoring services started in US in early 1920s and were introduced to other parts in 1960s

A study group appointed by International Institute for the Unification of Private Law (UNIDROIT), Rome 1988 defines

“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; i) finance, (ii) maintenance of accounts, (iii) collection of debts and (iv) protection against credit risk

Factoring Services - Mechanism

Buyer Buyer negotiates terms of purchasing the

material with the seller Buyer receives delivery of goods with

invoice and instructions by the seller to make payment to factor on due date

Buyer makes payment to factor in time or gets extension of time or in the case of default is subject to legal process at the hands of the factor

Factoring Services - Mechanism Cont…

Seller MoU with the buyer in the form of letter exchanged

between them or agreement Sells goods to the buyer as per MoU/agreement Delvers copies of invoice, delivery challan, MoU,

instructions to make payment to factor given to buyer Seller receives 80 percent or more payment in advance from

factor on selling the receivables from buyer to factor Seller receives balance payment from factor after deduction

of facto’s service charges etc.


Factor Factor enters into agreement with seller for rendering factoring

services On receipt of copies of sale documents as referred to above

makes payment to seller of the 80 percent of the price of the debt

Factor receives payment from the buyer on due dates and remits money to seller after usual deductions

Factor also ensures that the following conditions met to give full effect to factoring arrangements Invoice, bills or other documents drawn by the seller should

contain a clause that these payments arising out of transaction as referred to or mentioned in might be factored


Seller should confirm in writing to the factor that all the payments arising out of these bills are free from any encumbrances, charge lien, pledge, hypothecation or mortgage or right of set-off or counter claim from another

Seller should execute a deed of assignment in favor of the factor to enable him to recover the payment at the time or after default

Seller should confirm that all conditions to sell-buy contract between him and the buyer have been complied with and the transactions complete

Seller should procure a letter of waiver from a bank in favor of factor in case the bank has a charge over the assets sold to buyer and the sale proceeds are to be deposited in the account of the bank

FUNCTIONS OF FACTORING :

Depending on the type/form of factoring,the main function of a factor ,in general terms can be classified into five categories ::

Maintenance/administration of sales ledger Collection facility/of accounts receivable Financing facility/trade debts Assumption of credit risk/credit control & credit

protection Provision of advisory services

Factoring Services - Concept

COST/CHARGES FOR FACTORING SERVICES

Factor charges Commission (as a flat percentage of value of Debts purchased) (0.50% to 1.50%)

Commission is collected up-front. For making immediate part payment, interest

charged. Interest is higher than rate of interest charged on Working Capital Finance by Banks.

If interest is charged up-front, it is called discount.

Types of Factoring Services

RECOURSE FACTORING

Recourse Factoring In this type of factoring arrangement, the factor provides all types of facilities except debt protection In other words, the client is responsible for any bad debts incurred It is popular in developing countries

Types of Factoring Services Cont…

RECOURSE FACTORING cont…..Upto 75% to 85% of the Invoice Receivable is factored. Interest is charged from the date of advance to the date of

collection.Factor purchases Receivables on the condition that loss

arising on account of non-recovery will be borne by the Client.

Credit Risk is with the Client.Factor does not participate in the credit sanction process. In India, factoring is done with recourse.


Non-Recourse Factoring :

Non-Recourse Factoring It is the most comprehensive type of factoring arrangement offering all types of services namely: Finance Sales Ledger Administration Collection Debt Protection Advisory Services

Non-Recourse Factoring It gives protection against bad debts to the client In other words, in case the customer fails to pay, the factor will have ‘no recourse’ to the client and will have to absorb the bad debts himself It is popular in developed countries


Non-Recourse Factoring : Factor purchases Receivables on the condition that the Factor has

no recourse to the Client, if the debt turns out to be non-recoverable.

Credit risk is with the Factor.

Higher commission is charged.

Factor participates in credit sanction process and approves credit limit given by the Client to the Customer.

In USA/UK, factoring is commonly done without recourse.


Advance & Maturity Factoring : Advance & Maturity Factoring In advance

factoring, the factor pays a pre-specified portion of the factored receivables and the balance is paid on collection In maturity factoring, payment is made only on the guaranteed payment date or on the date of collection


Advance & Maturity Factoring : Factor does not make any advance payment to the Client.

Pays on guaranteed payment date or on collection of Receivables.

Guaranteed payment date is usually fixed taking into account previous collection experience of the Client.

Nominal Commission is charged.

No risk to Factor


full/Old Line Factoring : Old Line Factoring Old line factoring is also

known as full factoring as it provides an entire spectrum of services such as: Collection Credit protection Sales Ledger administration Short term finance It includes all features of non-recourse and advance factoring


Disclosed Factoring : The name of the factor is disclosed in the

invoice by the suppliers-manufacturer of the goods asking the buyer to make payment to the factor

Generally ,the factors assumes the risk under non-recourse arrangements .

Limit as non-recourse is laid down in agreement beyond which the dealings are done on a recourse base


Undisclosed Factoring : In undisclosed factoring, the client’s

customers are not notified of the factoring arrangement The client himself undertakes sales ledger administration and collection of debts Client has to pay the amount to the factor irrespective of whether customer has paid or not


Cross Border Factoring / International Factoring :

Cross Border Factoring / International Factoring In the international business transactions, factoring services are provided by factors of both countries This is known as Cross Border Factoring / International Factoring



It is similar to domestic factoring except that there are four parties, viz.,

a) Exporter,

b) Export Factor,

c) Import Factor, and

d) Importer. It is also called two-factor system of factoring.Exporter (Client) enters into factoring arrangement with

Export Factor in his country and assigns to him export receivables.


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.

FACTORING vs

BILLS DISCOUNTING

BILL DISCOUNTING1. Bill is separately examined

and discounted.

2. Financial Institution does not have responsibility of Sales Ledger Administration and collection of Debts.

3. No notice of assignment provided to customers of the Client.

FACTORING1. Pre-payment made against

all unpaid and not due invoices purchased by Factor.

2. Factor has responsibility of Sales Ledger Administration and collection of Debts.

3. Notice of assignment is provided to customers of the Client.

FACTORING vs

BILLS DISCOUNTING (Cont…)

BILLS DISCOUNTING

4. Bills discounting is usually done with recourse.

5. Financial Institution can get the bills re-discounted before they mature for payment.

FACTORING

4. Factoring can be done without or without recourse to client. In India, it is done with recourse.

5. Factor cannot re-discount the receivable purchased under advanced factoring arrangement.

STATUTES APPLICABLE TO FACTORING

Factoring transactions in India are governed by the following Acts:-

a) Indian Contract Act

b) Sale of Goods Act

c) Transfer of Property Act

d) Banking Regulation Act.

e) Foreign Exchange Regulation Act.

WHY FACTORING HAS NOT BECOME POPULAR IN INDIA

Banks’ reluctance to provide factoring services

Bank’s resistance to issue Letter of Disclaimer (Letter of Disclaimer is mandatory as per RBI Guidelines).

Problems in recovery.

Factoring requires assignment of debt which attracts Stamp Duty.

Cost of transaction becomes high.

Factoring Final Ppt (Dhrumil)

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Transcript of Factoring Final Ppt (Dhrumil)