PRESENTATION ON FACTORING

PRESENTED BY GROUP: 6
LEENA CHELLANI (11015) MANSI DESAI (11017) SHEETAL KURUP (11035) KRUTI PANDYA (11048)

INTRODUCTION
With the advent of globalisation and liberalisation, competition among firms both domestic and international has increased.

Along with rapid changes in environmental and technological changes there has also been a slowdown in economic activities globally too.

In this scenario, management of cash and receivables is of utmost important to both corporate giant and small firms.

Many businesses have collapsed for want to liquidity.

The key to success lies in converting credit sales to cash sales within a short time period.

There are many traditional methods such as cash credit, bills discounting and consumer credit through financial intermediaries that help in raising short term funds against credit sales or receivables.

THE ORIGIN OF FACTORING

The word factor is derived from the Latin word FACERE, which means to make or do or to get things done. Factoring originated in countries like USA, U.K, France, etc where specialized financial institutions were established to assist firms in meeting their working capital requirements by purchasing their receivables. Factoring as financing against receivables got a boost in the 1930s but there was no comprehensive framework of statutory law for a factoring arrangement.

In the UK factoring came into existence in the form of invoice discounting. In 1976, the lending factoring companies in UK, formed the Association of British Factors (ABF).

The factoring business has now thrived in Italy and AsiaPacific countries too.

WHAT IS FACTORING ?
Factoring is a continuing arrangement between a financial intermediary known as factor and a business concern client, whereby the factor purchases the clients accounts receivable/book debts either with or without recourse to the client. Factoring is a collection and financial service designed to improve the clients cash flow by turning credit sales invoices into ready cash.

Besides purchase of accounts receivables, a factor may provide a wide range of services such as the following:
Credit management and covering the risk involved. Arrangements for collection of debts. Administration of the sales ledger. Provision of repayment of funds against the debt it agreed to buy.

So, a Factor is,

A Financial Intermediary That buys invoices of a manufacturer or a trader, at a discount, and

Takes responsibility for collection of payments.

PARTIES IN FACTORING
1. Seller of goods, who has to realize credit sales from buyer

2. Buyer of the goods, who has to pay for them on credit terms
3. Factor, who acts as agent realizing credit sales from buyer and passes on the realized sum to the seller after deducting a commission

TYPES OF FACTORING
Invoice Discounting

Bulk Factoring Full Factoring

Advance Factoring

Maturity Factoring

Agency Factoring

Recourse Factoring

CHARGES OF FACTORING
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.

International Factoring Charge

In international factoring, there are 2 types of charges

Discount charge Service charge

Factor levies discount charge for prepayment and service charge for allied services, which includes a 100% risk protection. The charge is generally calculated as a percentage on a flat basis on the gross invoice value.

ADVANTAGES OF FACTORING
The clients credit sales are immediately converted into ready cash as the factor makes a payment of around 80% of the factored invoices in advance. This proportion of finances higher than the bank finance against the credit sales.

The factor provides a comprehensive credit control system by analyzing payment history. This helps in assessing the quality of debtors & monitoring their financial health.

The client is free from the tensions of monitoring his sales ledger & can concentrate on production, marketing, & other aspects. This results in a reduction in overhead expenses & an increase in sales & profits. Factoring improves liquidity of the clients and, thereby, improves the quality of advances of banks. Factoring is not a threat to the banking; it is a financial service complementary to that of the banks. The customer has not to furnish any documents. He has merely to acknowledge the notification latter, that is, an undertaking to make payment of the invoices to the factor.

DISADVANTAGES OF FACTORING
Engaging a factor may be reflective of the inefficiency of the management of the firms receivables. Factoring may be redundant if a firm maintains a nation-wide network of branches.

Difficulties arising from the financial evaluation of clients A competitive cost of factoring has to be determined before taking a decision about engaging a factor.

METHODS OF EVALUATION

Net benefit method:

Factoring is a short term financing option, provided the expected benefits exceed the expected costs. Under this method, the desirability of factoring is determined on the basis of the next benefit accruing from it.

Net Benefit = Expected benefits > Expected cost

Effective rate of interest method

Under this method, decision about factoring is made on the effective interest that would be incurred due to factoring by the firm. If the effective rate of interest of the firm is less than that of other short-term finance, the factoring is considered viable.

Effective rate of return = net factoring cost * 100 / net factor advance

Mechanism.

CLIENT

CUSTOMER

FACTOR

INTERNATIONAL FACTORING
International factoring eases much of the credit and collection burden created by international sales. It is a comprehensive range of receivables management and financing services wherein a factor provides an exporter with at least 2 of the following services:
Credit guarantee Collection services Finance up to 90% of the invoice value on shipment to approved debtor Credit management and bad debt protection Professional sales ledger and analysis

Factor Chain International India (2011) Factor Chain International India (2011) Factor Chain International India (2011)

Factor Chain International

Factors Chain International is a global network of leading factoring companies, whose common aim is to facilitate international trade through factoring and related financial services.

The concept of international or cross border factoring was still new and restricted in scope by its lack of geographic coverage.
According to FCI, the growth rate in international factoring is greater than the growth rate in domestic factoring.

Factor Chain International India (2011) is as under:

Number of Factoring companies: Domestic Factoring Turnover (in Millions of EUR): International Factoring Turnover (in Millions of EUR): Total Factoring Turnover (in Millions of EUR): FCI Members DBS Bank Ltd. IFCI Factors Ltd. SBI Global Factors Ltd. Standard Chartered Bank The Hongkong and Shanghai Banking Corporation Ltd. 11 2,600 150 2,750

FACTORING vs FORFAITING
Characteristic Factoring Suitability For transactions with short-term maturity period not exceeding 6 months Recourse Cost Extent of Financing Basis of Financing Services With or without recourse Cost of factoring is usually borne by the seller Only a certain percent of receivables factored is advanced Finance depends on the credit standing of the exporter Besides financing, a Factor also provides other services such as ledger administration Forfaiting For transactions with mediumterm maturity period ranging from 90 days and up to 5 years without recourse only Cost is usually borne by the overseas buyer (buyer) 100% finance is available Financing depends on the financial standing of the availing bank It is a pure finance arrangement

WHY FACTORING IS NOT POPULAR IN INDIA Banks reluctance to provide factoring services Banks resistance to issue Letter of Disclaimer (Letter of Disclaimer is mandatory as per RBI Rules). Problems in recovery. Factoring requires assignment of debt which attracts Stamp Duty. Cost of transaction becomes high.

RBI GUIDELINES

Prior approval

Reporting

RBI Clearance

In 1990, RBI issued the following guidelines for regulating the factoring services provided by the bank

Exclusive Business

Subsidiaries

Investment Limit

FACTORING IN INDIAN SCENARIO

Canbank Factors Ltd

Foremost Factors Ltd (FFL)

SBI Factors and Commercial Services (SBI FACS) Ltd

Export Credit Guarantee Corporation of India Ltd. (ECGC)

Major factoring firms in India

India Factoring and Finance Solutions Pvt Ltd (India Factoring)

The Hongkong and Shanghai Bank Corporation Limited (HSBC)

Global Trade Finance Ltd (GTF)

Jointly promoted by the Canada Bank, Andhra Bank and SIDBI in August, 1992. Its Rs. 10 crore paid-up capital was contributed in the proportion of 60:20:20 by three promoters respectively. Initially operated in the south zone but regional restrictions on their operations were subsequently removed by the RBI. Main services provided by the Canbank Factors Ltd are domestic factoring and invoice discounting.

Incorporated in February 1996. Promoted by Mohan Group and Nations Bank Overseas Corporation of U.S.A. along with 20th Century Finance Corporation Limited (TCFC Limited) and ICDS Group as institutional investors. Changed its name to IFCI Factors Limited as when IFCI acquire the share capital of the company in 2008-09. Major services are domestic sales bill factoring, purchase bill factoring, export sales bill factoring and corporate loan.