201

FACTORING AND FORFAITING

COMMERCIAL
BANKING
TERM PROJECT
Presented By:
Rajan A - B12035
Lakshman Singh - B12021
Sunil Manchandia - B12051

Praxis Business School

Dossier - Sundrop Oil

A Brand

Agenda
2

Factoring
Steps in Factoring
Factoring Process
Types of Factoring
Pros and Cons of Factoring
Factoring Vs. Bank Loan
Factoring Vs. Bills Discounting
Eligibility and Documentation
Factors Fees and Expenses
Forfaiting
Forfaiting Process
Costs Involved in Forfaiting
Factoring Vs. Forfaiting
Comparative Analysis Bills Discounting, Factoring and Forfaiting
Praxis Business School
Factoring and Forfaiting

Factoring
3

Factoring can be defined as the conversion of credit sales

into cash.
Factoring is a transaction where the exporter sells its

receivables to a financial institution which is usually a bank.

The Factoring institution buys the accounts receivable and

pays up to 80% of the amount to a company usually a client.

Examples includes factoring against goods purchased,

factoring against medical insurance, factoring for

construction services etc.

Praxis Business School

Factoring and Forfaiting

Parties Involved In Factoring

4

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.

The factoring transaction involves three

parties:
Supplier or Seller (Client)
Buyer or Debtor (Customer)
Financial Intermediary (Factor)
Praxis Business School
Factoring and Forfaiting

Steps in Factoring
5

Step 1

Customer places the order with client

Step 2

Client obtains a prepayment limit from factors

Step 3

Client delivers goods/services to the customers

Step 4

Copies of invoices, along with a notice to pay

submitted to factors

Step 5

Factors makes a prepayment advance to the client

Step 6

Factors follows up on payment with the customers

Step 7

Customer makes payments for factors

Step 8

Factors makes the balance payment to the client

Praxis Business School

Factoring and Forfaiting

Factoring Process
6

Praxis Business School

Factoring and Forfaiting

International Factoring Process

7

Source: HSBC
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Factoring and Forfaiting

Types of Factoring
8

Types of
Factoring

Disclose
d

Recourse

NonRecourse

Praxis Business School

Factoring and Forfaiting

Undisclo
sed

Maturity

Advance

Pros and Cons of Factoring

9

Pros
Receive cash as soon as

orders are invoiced

Improves cash cycle
Protection from bad
debts (if you choose nonrecourse factoring)
Inexpensive way to
collect debts

Praxis Business School

Factoring and Forfaiting

Cons
It can be expensive
Hamper relationship with

customers
Exiting the agreement
can be difficult

Factoring Vs. Loan

10

Factoring is a word often misused synonymously with bank

loan.
Factoring is a financial transaction whereby a business sells its

accounts receivable (i.e., invoices).

Factoring differs from a bank loan in three main ways.

The emphasis is on the value of the receivables, not the

firms credit worthiness.
Factoring is not a loan it is the purchase of an asset (the
receivable).
A bank loan involves two parties whereas factoring involves
three

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Factoring and Forfaiting

Factoring Vs. Bills Discounting

11

Factoring
Responsibility of collection of

Debts
Can be done with or without
recourse
Pre-payment made against
all unpaid and not due
invoices purchased by Factor
Notice of assignment is
provided to customers of the
Client
credit/ payment risk on factor
Praxis Business School
Factoring and Forfaiting

Bills Discounting
No responsibility of

collection of Debts
Usually done with
recourse
Bill is separately
examined and discounted
No notice of assignment
provided to customers of
the Client
Credit risk on client

Eligibility and Documentation

12
Factoring Solutions are offered to the following type of

concerns
Sole Proprietorships
Partnerships
Private Limited Companies
Other criteria

The entity should be in operation for the last 3 years

The entity should have generated profits during the last 2 years
and should satisfy our internal credit parameters.
The concern must have a positive tangible net worth.
Proof of identity
Proof of individual identity
Proof of residence address

Source: HSBC India

Praxis Business School
Factoring and Forfaiting

Factors Fees and Expenses

13
Commissions: Factors charge commissions for the credit risk they

assume and for providing bookkeeping, ledgering, collection and

other administrative services to their clients (0.50% to 1.50%)
Commitment fees: Factors typically charge commitment fees at

inception of the factoring facility

Interest: Factors charge interest on prepayment
Additional fees: Additional fees may apply in any given factoring

agreement. For example, some factors charge minimum monthly

discount fees, and early termination fees may also apply if the
client wants to terminate the arrangement ahead of its stated
expiration date

Praxis Business School

Factoring and Forfaiting

Factoring Companies in India

14

Canbank Factors Limited

SBI factors and commercial services Pvt. Ltd
HSBC
Foremost Factors Limited
Global Trade Finance Limited
Citibank India
Small Industries Development Bank of India (SIDBI)
Standard Chartered Bank

HSBC

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Factoring and Forfaiting

Why Factoring Has not become popular

in India
15

Banks reluctance to provide factoring services

Banks 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

Praxis Business School

Factoring and Forfaiting

Forfaiting
16

The terms forfaiting is originated from a old French word

forfait, which means forfeiting or surrender of right.

Forefaiting is a mechanism by which the right for export

receivables of an exporter (Client) is purchased by a Financial

Intermediary (Forfaiter) without recourse to him.
Forfaiting is a mechanism of financing export

Available by discounting export receivable

Evidenced by bills of exchange or promissory notes
Without recourse to the seller (viz. exporter)
Operated on a fixed rate basis (discount)
Available upto 100% of the contract value.

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Factoring and Forfaiting

Forfaiting Process
17

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Factoring and Forfaiting

Pros and Cons of Forfaiting

18

Pros
100 per cent financing
Improves cash flow
Reduced administration

cost
Increased trade
opportunity
Eliminates the risk of nonpayment
Risk elimination (Exchange
risk, and political risks etc)
Praxis Business School
Factoring and Forfaiting

Cons
It is very expensive

(banks take high fees

due to high risks)
Not available for short
period
Not available in
financially week country

Costs Involved in Forfaiting

19

Commitment Fee:- Payable to Forfaiter by Exporter in

consideration of forfaiting services.

Commission:- Ranges from 0.5% to 1.5% per annum.
Discount Fee:- Discount rate based on LIBOR for the period

concerned.
Documentation Fee:- where elaborate legal formalities are

involved.
Service Charges:- payable to Bank.
Forfaiting
Calculation

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Factoring and Forfaiting

Factoring Vs. Forfaiting

20
Points of
Difference

Factoring

Forfaiting

Extent of
Finance

Usually 75 80% of the value of

the invoice

100% of Invoice value

Finance

Short-term finance (90 to 150

days or more)

Long Term Finance (180 days

to 7 years)

Credit
Worthiness

Factor does the credit rating in

case of non-recourse factoring
transaction

The Forfaiting Bank relies on

the creditability of the
Avalling Bank.

Services
provided

Day-to-day administration of
sales and other allied services

No services are provided

Recourse

With or without recourse

Always without recourse

Sales

By Turnover

By Bills

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Factoring and Forfaiting

Comparative Analysis
21

Bills Discounted

Factoring

Forfaiting

Scrutiny

Individual Sale
Transaction

Service of Sale
Transaction

Individual Sale
Transaction

Extent of
Finance

Upto 75 80%

Upto 80%

Upto 100%

Recourse

With Recourse

With or Without
Recourse

Without Recourse

Sales
Administratio
n

Not Done

Done

Not Done

Term

Short Term

Short Term

Medium Term

Charge
Creation

Hypothecation

Assignment

Assignment

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Factoring and Forfaiting

22

THANK YOU

Praxis Business School

Factoring and Forfaiting