BILL DISCOUNTING While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customers account. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment.
CONDITIONSA bill must be a usance bill. It must have been accepted and bears at least two good signatures (e.g. of reputable individuals, companies or banks etc.) The Bank will normally only discount trade bills. Where a usance bill is drawn at a fixed period after sight the bill must be accepted to establish the maturity.
CONDITIONS The discount should be based on real trade background. The discount tenor starts from the date of discount and expires at the maturity of the bill.
DIFFERENT TYPES OF BILLSDISCOUNTING Sales bill discounting (Drawer bill discounting) Supplier bill discounting (Drawee bill discounting) LC Bill discounting
What is factoring? Factoring is an ongoing arrangement between the client and the factor, where the sales of goods and services are made on open account terms and the invoices for the same are assigned to the factor regularly for the purpose of funding, collection and sales ledger administration. Factoring involves a long-term relationship between the buyer and the seller with the whole turnover being assigned to the factoring company.
Origin Came into existance in the year 1920 It was not an organised sector that time Association of British Factors(ABF) came in 1976 Nearly 90% of global factoring turnover comes from USA & Europian countries RBI appointed the C.S.Kalyanasundaram Committee (1988) It suggested to start factoring by a bank through its subsidiary
As of today, Worldwide, factoring volume is more than USD 700 billion a year Spread over nearly 60 countries and covering more than 1,00,000 businesses. Particularly in developed countries, factoring is an accepted way of conducting business.
Why use Factoring? Through the use of Factoring receivables are instantly converted into cash leading to improved cash flows that can help funding of future growth. It facilitate an efficient follow up of payments from buyers, which is made possible through relationships developed by factors with client’s buyers. Factoring provides credit protection for export sales which enables to do business with buyers who are unwilling to open Letters of Credit. Factoring also provides other peripheral services such as advisory services, credit assessment, etc.
What are the types of factoringarrangement? There are basically two types of Factoring arrangements: 1) Domestic Factoring- If you are selling in India. 2) International Export Factoring- If you are exporting form India.
Domestic Factoring The factoring arrangement where all the three- the factor, the seller and the buyer are in the same country, subject to the same laws.
International Factoring The factoring arrangement, where the seller and the buyer are in two different countries involving co-operation between two factoring companies, one in the seller’s country (Export Factor) and the other in the buyer’s country (Import Factor)
Major Types of FactoringNon-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 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.
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.
Invoice Discounting In this type of factoring arrangement, only finance is provided and no other service is offered.
Undisclosed Factoring Or OpenAccount Receivables The factor does not follow up or collect payment from the customer. The customer may not be aware of the factoring arrangement and pays the client directly. The factor receives payment of invoices through the client.
Factoring Charges Finance Charge - It represents the interest on funds made available to the client by way of prepayment against purchase of approved invoices. Service Charge - The charge levied for rendering non-funding services such as collection, sales ledger maintenance and other advisory services.
How much advance can Client get? Advances are made as a percentage of invoice value based on criteria, such as, quality of receivables, number and quality of the buyers and client’s requirements. Typically 80 % of invoice value is advanced.
Advantages (to the client) Immediate conversion of cash sale Competitive credit terms Accelerate the production cycle Free from tensions Efficient W.Cap. Management Assessing quality of debtors Expansion of business
Advantages To the Buyers – Adequate credit facilities – Getting periodical statement from the factor – No affect on quality of goods, contractual obligations etc.
Benefits of International Factoring To the Exporter – Deals with only one factor – He gets specialised knoweledge – Risk of B/D are reduced To the Importer – Pays the invoice in the same country – Gets better credit terms
Factoring is not suitable under followingcases - a) where large volume of cash sales take place. b) engaged in speculative business. c) selling highly specialized capital equipments or made-to-order goods. d) where credit period offered to the buyers is more than 180 days. e) where there is Consignment Sale or Sale or Return Arrangements. f) where sales are to the sister / associated companies . g) where sales are to the public at large, etc.
FCI (Factors Chain International) FCI is a global network of leading factoring countries It helps its members achieving competitive advantage through: – A global network – Modern & effective communication system – Reliable legal framework – Standard procedures – Universal quality – World wide promotion – Training programmes
Factoring Profile(India) Number of factoring companies – 08 From Domestic factoring turnover – 1450 (million euros) From International factoring turnover - 175 (million euros) From Total factoring turnover - 1625 (million euros)
Large number of industries Covered under factoring, including automobiles, pharmaceuticals, textile, garment and engineering. In addition to the manufacturing sector, the services sector industries, such as, traveling, telecommunications, software services and so on are also suitable for factoring.
FCI Members Can Bank Factors Ltd. - Bangalore www.canbankfactors.com City Bank – Mumbai ECGC of India Ltd.- Mumbai Foremost Factors Ltd.- New Delhi www.foremostfactors.net Global Trade Finance Ltd.- Mumbai www.gtfindia.com SBI Factors & Commercial Services Pvt.Ltd – Mumbai www.sbifactors.com The HSBC Ltd. - Mumbai www.hsbc.co.in
Bill Discounting Vs Factoring Individually Acceptance One time acceptance Short term duration Long term High cost Low cost More paper work Less paper work 3 days grace period Higher grace period Requirement of original Copies -o.k. documents Off B/s is possible Off B/s can not be Both domestic & Domestic International No assignment of debt Assignment of debt
ForfaitingForfaiting, or Medium-Term Capital Goods Financing, means selling a bill of exchange, at a discount, to a third party, the Forfaiter, who collects the payment from an, essentially, overseas customer, through a collateral bank(s), and, thus, assuming the underlying responsibility of exporters and simultaneously providing trade finance for importers by converting a short-term loan to a medium term one.
Forfaiting… Done on a non - recourse basis Used for international trade transactions, usually for transactions not less than $100,000 Tenor of instrument ranges from 180 days to 10 years payments are made quarterly, semi-annually, annually, or on a bullet basisNot so Popular as People are suspicious of its simplicity coupled with a lack of complex documentation
Information the Forfaiter needs who the buyer is and his nationality; what goods are being sold; details regarding the value and currency of the contract; the date and duration of the contract,including the credit period and number and timing of payments (including any interest rate already agreed with the buyer) evidence of debt that will be used (either promissory notes, bills of exchange, letters of credit) the identity of the guarantor of payment (or avalor).
Documents requiredby Forfaiter from exporter Copy of supply contract, or of its payment terms Copy of signed commercial invoice Copy of shipping documents including certificates of receipt, railway bill, airway will, bill of lading or equivalent documents Letter of assignment and notification to the guarantor Letter of guarantee, or aval (standby letters of credit may also be used)
Forfaiting Charges Forfaiters try to ensure that the buyer, not the seller, incurs charges involved in a Forfait transaction.Charges depend on the level of interest rates relevant to the currency of the underlying contract at the time of the Forfaiters commitment the Forfaiters assessment of the credit risks related to the importing country and to the avalizing (or guaranteeing) bank
Forfaiting vs Export FactoringSimilarities Doneon Non – recourse basis Common features for advance payment
Differences Forfaiting Export FactoringThe entire value of bill is Discounted value rangesdiscounted by forfaiter between 75 – 85 %Involvement of Availing Bank Export factor assesses credit worthinessPurely a financing arrangement Also includes ledger administration, collection, etcLong term Short termExchange rate fluctuations are Exchange rate fluctuations notguarded against guarded against