Escolar Documentos
Profissional Documentos
Cultura Documentos
FACTORING SERVICES
Kushal Walia
UM10905
Pujit Singh UM10304
Shivam Miglani UM10307
Sahib Singh
UM10809
TABLE OF CONTENTS
1
1.2
1.3
Characteristics ........................................................................................................... 3
3.1
3.2
3.2.1
3.2.2
Collection of Receivables................................................................................... 6
3.2.3
Provision of Finance........................................................................................... 7
3.2.4
3.2.5
4.2
5.2
5.3
5.4
6.1.1
6.1.2
6.1.3
6.1.4
6.2
6.3
Suggestions: .............................................................................................................12
References .......................................................................................................................13
1 WHAT IS FACTORING?
One of the oldest forms of business financing, factoring is the cash-management tool of choice for many
companies. Factoring is very common in certain industries, such as the clothing industry, where long
receivables are part of the business cycle.
In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service and
generates an invoice. The factor (the funding source) buys the right to collect on that invoice by
agreeing to pay you the invoice's face value less a discount--typically 2 to 6 percent. The factor pays 75
percent to 80 percent of the face value immediately and forwards the remainder (less the discount)
when your customer pays.
1.3 CHARACTERISTICS
Because factors extend credit not to their clients, but to their clients' customers, they are more
concerned about the customers' ability to pay than the client's financial status. That means a
company with credit-worthy customers may be able to factor even if it can't qualify for a loan.
Once used mostly by large corporations, factoring is becoming more widespread. Still, plenty of
misperceptions about factoring remain.
Factoring is not a loan; it does not create a liability on the balance sheet or encumber assets. It is the
sale of an asset--in this case, the invoice. And while factoring is considered one of the most expensive
forms of financing, that's not always true. Yes, when you compare the discount rate factors charge
against the interest rate banks charge, factoring costs more. But if you can't qualify for a loan, it doesn't
matter what the interest rate is. Factors also provide services, banks do not: They typically take over a
significant portion of the accounting work for their clients, help with credit checks, and generate
financial reports to let you know where you stand.
The idea that factoring is a last-ditch effort by companies about to go under is another
misperception. Walt Plant, regional manager with Altres Financial, a national factoring firm
based in Salt Lake City, says the opposite is true: "Most of the businesses we deal with are very
much in an upward cycle, going through extremely rapid growth." Plant says you may be a
candidate for factoring if your company regularly generates commercial invoices and you could
benefit from reducing the time receivables are outstanding. Factoring may provide the cash you
need to fund growth or to take advantage of early-payment discount suppliers offer.
Factoring is a short-term solution; most companies factor for two years or less. Plant says the factor's
role is to help clients make the transition to traditional financing. Factors are listed in the telephone
directory and often advertise in industry trade publications. Your banker may be able to refer you to a
factor. Shop around for someone who understands your industry, can customize a service package for
you, and has the financial resources you need.
Credit Cover: The factor takes over the risk burden of the client and thereby the clients credit is
covered through advances.
Case advances: The factor makes cash advances to the client within 24 hours of receiving the
documents.
Sales ledgering: As many documents are exchanged, all details pertaining to the transaction are
automatically computerized and stored.
Collection Service: The factor, buys the receivables from the client, they become the factors debts and
the collection of cheques and other follow-up procedures are done by the factor in its own interest.
Provide Valuable advice: The factors also provide valuable advice on the country-wise and customerwise risks. This is because the factor is in a position to know the companies of its country better than
the exporter clients.
2 TYPES OF FACTORING
The types of factoring are discussed below:
(i) Recourse Factoring: In Recourse factoring the credit risk remains with the client, though the debt is
assigned to the factor, i.e., the factor can have recourse to the client in the event of non-payment by the
customer.
(ii) Non-Recourse Factoring: The Non-Recourse Factoring also called as Old-line factoring. It is an
arrangement whereby he factor has no recourse to the client when the bill remains unpaid by the
customer. Thus, the risk of bad debt is absorbed by the factor.
(iii) Advance Factoring: Where the payment is made by the factor immediately is called Advance
Factoring Under this type of factoring, the factor provides a financial accommodation apart from nonfinancial services rendered by him.
(iv) Confidential and Undisclosed Factoring: In confidential and undisclosed factoring the arrangement
between the factor and the client are left un-notified to the customers and the client collects the bills
from the customers without intimating them to the factoring arrangements.
(v) Maturity Factoring: In maturity factoring method, the factor may agree to pay an amount to the
client for the bills purchased by him either immediately or on maturity. The later refers to a date agreed
upon on which the factor pays the client.
(vi) Supplier Guarantee Factoring: Supplier Guarantee Factoring is also known as drop shipment
factoring. This happens when the client is a mediator between supplier and customer. When the client
is a distributor, the factor guarantees the supplier against the invoices raised by the supplier upon the
client and the goods may be delivered to the customer. The client thereafter raises bills on the customer
and assigns them to the factor. The factor thus enables the client to make a gross profit with no financial
involvement at all.
(vii) Bank Participation Factoring: In bank participation factoring the bank takes a floating charge on the
clients equity, i.e. the amount payable by the factor to the client in respect of his receivables. On this
basis, the bank lends to the client and enables him to have double financing.
(ix) Cross-border/International Factoring: In domestic factoring, there are 3 parties involved customer,
client and the factor. But in international factoring, 4 parties are involved, namely exporter(client),
importer(customer), export factor, and import factor.
(x) Invoice Discounting: It is a variant of factoring, It provides finance against invoices backed by letters
of credit by banks. The factor provides finance once the letter of credit opening bank confirms the due
date of payment.
3 PROCEDURAL ASPECTS:
3.1 THE FACTORING PROCESS
The steps involved in factoring are discussed below:
In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service and
generates an invoice. The factor (the funding source) buys the right to collect on that invoice by
agreeing to pay you the invoice's face value less a discount--typically 2 to 6 percent. The factor pays 75
percent to 80 percent of the face value immediately and forwards the remainder (less the discount)
when your customer pays.
The diagram depicts the 9-step process of factoring.
Factoring is divided into 9 discrete steps, each of which involve some financial considerations, which
have been discussed in the following sections.
iv.
v.
vi.
vii.
He ensures that invoices raised represent genuine trade transactions in respect of goods
sold or services provided.
He updates the sales ledger with latest invoices raised and cash received.
He ensures that monthly statements are sent to the debtors, efforts are made to collect the
dues on the due dates through an efficient mechanism of personal contacts, issuance of
reminders, telephone messages etc.
He remits the retention to the clients after collection of the dues. Where the factoring is
operating on Fixed Maturity Period (FMP) basis, the factor is to ensure that the client
receives the retention money at the expiry of the said period.
He establishes close links with the client and the customers to resolve the various disputes
raised in respect of quantity or quality of the goods/services supplied besides the
unauthorized discounts claimed or deducted by the debtors while making payment.
He reviews the financial strength of the debtors at periodic intervals to ensure the
collectability of debts.
He submits at periodic intervals the reports containing information as to the details of
overdue unpaid invoices, disputes, legal cases etc. to the client.
4 IMPORTANCE OF FACTORING
4.1 ADVANTAGES OF FACTORING:
1. It helps improve the current ratio. Improvement in the current ratio is an indication of improved
liquidity. Enables better working capital management. This will enable the unit to offer better credit
terms to its customers and increase orders.
2. It increases the turnover of stocks. The turnover of stock into cash is speeded up and this results in
larger turnover on the same investment.
3. It ensures prompt payment and reduction in debt.
4. It helps to reduce the risk. Present risk in bills financing like finance against accommodation bills can
be reduced to a minimum.
5. It helps avoid the collection department. The client need not undertake any responsibility of collecting
the dues from the buyers of the goods.
Amount(Rs)
Assets
Amount(Rs)
Bank Borrowings
7,00,000
Inventory
10,00,000
Against Inventory
4,00,000
Receivables
8,00,000
Against Receivables
4,00,000
2,00,000
5,00,000
Other Current
Assets
Total
20,00,000
20,00,000
Amount(Rs)
Assets
Amount(Rs)
Bank Borrowings
7,00,000
Inventory
10,00,000
1,60,000
Other Current
Assets
2,00,000
Total
13,60,000
Against Inventory
Against Receivables
1,60,000
5,00,000
13,60,000
The factor performs basis functions like administration of the sellers sales ledger, credit control,
collection of dues, etc. This saves the administration costs.
The improved liquidity position enables the firm to honour its obligations without any delay.
The improved credit standing helps the firm to get the benefits of lower purchase price, longer
credit period from suppliers, trade discount on bulk purchases, cash discount for early payment,
better market standing, quicker sanction of loans and advances, and better terms and
conditions while borrowing etc.
10
Bill2Cash: - The seller invoices the goods to the buyer, assigns the same to SBI factors, and
receives prepayment up to 90 percent of the invoice value immediately.
ii. Cash4Purchase: Facilitates instant payment for purchases made and is generally sanctioned in
conjunction with receivable factoring facility or export factoring.
6.1.4
Lack of a credit appraisal system and authentic information about customers and clients restricts
the growth of this business. As against this, in the UK and the USA, companies ,such as the Dunn
and Bradstreet, engage in credit appraisal systems.
ii. Higher stamp duty on the assigning of the debt increases the cost of the client which reduces
factoring arrangements.
iii. Non availability of permits to factoring companies for raising their debt restricts their financing
capacity and thereby growth of the market.
iv. Being registered as NBFCs, factoring companies are not eligible for refinance which limits the
extension of this facility to the exporters on open account sales. This restricts the growth of the
market.
6.3 SUGGESTIONS:
i.
ii.
iii.
iv.
v.
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7 REFERENCES
1.
2.
HTTP://WWW.ENTREPRENEUR.COM/ENCYCLOPEDIA/FACTORING
3.
HTTP://WWW.YOURARTICLELIBRARY.COM/ECONOMICS/FACTORING-SILENT-FEATURES-TYPES-STEPS-ADVANTAGEAND-LIMITATIONS/23514/
4.
5.
HTTP://WWW.UKESSAYS.CO.UK/ESSAYS/FINANCE/GROWTH-OF-FACTORING-IN-INDIA.PHP
6.
HTTP://EN.WIKIPEDIA.ORG/WIKI/FACTORING_%28FINANCE%29#TREATMENT_UNDER_GAAP
7.
HTTP://WWW.SBIGLOBAL.IN/ABOUT/ABOUTGTF.HTM
8.
WWW.CANBANKFACTORS.COM/
9.
HTTP://WWW.ENTREPRENEURINDIA.COM/ARTICLE/MANAGING-A-BUSINESS/FINANCE/FACTORING-AN-OPTION-OFFINANCING-304/
10. HTTP://WWW.THEINTERNATIONALJOURNAL.ORG/OJS/INDEX.PHP?JOURNAL=TIJ&PAGE=ARTICLE&OP=VIEW&PATH[]
=1260
11. ANIRBAN GHATAK, ROLE OF FACTORING IN FINANCING SMES IN INDIA, TIJRP RESEARCH JOURNAL OF SOCIAL
SCIENCE AND MANAGEMENT.
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