Factoring & Forfaiting


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  • factoring is the financial transaction in which one organization sell it's account receivables to the factoring agency for immediate cash.
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Factoring & Forfaiting

  1. 1. Presentation On Factoring & Forfeiting <ul><li>By:- </li></ul><ul><li>Harshil Shah 82 </li></ul><ul><li>Meet Sanghavi 77 </li></ul><ul><li>Bijal Shah 88 </li></ul><ul><li>Dhara Chauhan 15 </li></ul><ul><li>Dhara Zala 121 </li></ul>
  2. 2. Why we need Factoring? <ul><li>For Smooth cash flow </li></ul><ul><li>For meeting working capital needs </li></ul><ul><li>Overcome the situation from high cost of capital and reduced profit </li></ul>
  3. 3. Factoring Services - Concept <ul><li>Definition: </li></ul><ul><li>Factoring is defined as ‘a continuing legal relationship between a financial institution (the factor) and a business concern (the client), selling goods or providing services to trade customers (the customers) on open account basis whereby the Factor purchases the client’s book debts (accounts receivables) either with or without recourse to the client and in relation thereto controls the credit extended to customers and administers the sales ledgers’. </li></ul>
  4. 4. Factoring functions.. <ul><li>It is purchasing & collection the client’s a/c’s receivables (with or without recourse), </li></ul><ul><li>Sales Ledger management </li></ul><ul><li>Credit investigation & undertaking of risks </li></ul><ul><li>Provision of finance against debts </li></ul><ul><li>Rendering consultancy services </li></ul>
  5. 5. Factoring Services - Concept Client Customer Factor Order placed Deliver of goods Client submits invoice Factor-Prepayment Monthly statements Customer pays
  6. 6. Funding Process <ul><li>Fax the copy of invoice to factor </li></ul><ul><li>Factor processes the invoice </li></ul><ul><li>Get up to 80% of the invoice in 24 hours </li></ul><ul><li>20% kept in reserve account </li></ul><ul><li>Factor receives the payment from customer </li></ul><ul><li>Factor deducts fee from reserve account </li></ul><ul><li>Factor forwards the balance from reserve </li></ul>
  7. 7. Types of Factoring Services <ul><li>Full Service factoring or w/o recourse factoring </li></ul><ul><ul><li>Standard Factoring </li></ul></ul><ul><ul><li>Factor Assumes Credit Risk </li></ul></ul><ul><li>With Recourse Factoring </li></ul><ul><ul><li>Factor does not assume credit risk </li></ul></ul><ul><ul><li>If debtors not paid, clients have to take the work for collection </li></ul></ul>
  8. 8. <ul><li>Maturity Factoring </li></ul><ul><ul><li>Collection Factoring </li></ul></ul><ul><ul><li>Paid to clients only when factor gets money </li></ul></ul><ul><li>Bulk Factoring </li></ul><ul><ul><li>Disclosed Factoring </li></ul></ul><ul><ul><li>Provides Finance after disclosing the fact of assignments </li></ul></ul>
  9. 9. <ul><li>Invoice Factoring </li></ul><ul><ul><li>Only provides finance against invoices </li></ul></ul><ul><ul><li>All other works have to be done by clients </li></ul></ul><ul><li>Agency Factoring </li></ul><ul><ul><li>Factor and Client share the work </li></ul></ul><ul><ul><li>The Factor has to provide finance and assume risk </li></ul></ul><ul><li>International Factoring </li></ul><ul><ul><li>Done with exporters </li></ul></ul><ul><ul><li>Facilitated with the help of export factor and import factor </li></ul></ul>
  10. 10. Two-Factor System of Factoring <ul><li>There are usually four parties to a cross-border factoring transactions </li></ul><ul><ul><li>Exporter (client) </li></ul></ul><ul><ul><li>Importer (customer) </li></ul></ul><ul><ul><li>Export Factor </li></ul></ul><ul><ul><li>Import Factor </li></ul></ul><ul><li>Two factor system results in two separate but inter-linked agreements </li></ul><ul><ul><li>Between exporter and export factor </li></ul></ul><ul><ul><li>Between export factor import factor </li></ul></ul>
  11. 11. Two-Factor System of Factoring <ul><li>Functions of factors are divided between export factor and import factor </li></ul><ul><li>Import factor provides a link between export factor and the importer and serves to solve the international barriers like language problem, legal formalities and so on. He also underwrites customer trade credit risks, collects receivables and transfers funds to the export factor in the currency of the invoice </li></ul>
  12. 12. Exporter Importer Country A Country B Export Factor Import Factor Goods and invoices – Stage I Copy Invoice Stage II Prepayments Stage III Copy Invoices Stage IV Statements Stage V Payments Stage VI Payments Stage VII Payment of Commission Stage VIII
  13. 13. Benefits Of Factoring <ul><li>Financial Services </li></ul><ul><li>Collection Service </li></ul><ul><li>‘ Credit Risk’ Service </li></ul><ul><li>Provision of expertise ‘sales ledger management’ service </li></ul><ul><li>Consultancy service </li></ul><ul><li>Economy in Servicing </li></ul><ul><li>Off-balance sheet financing </li></ul><ul><li>Trade Benefits </li></ul><ul><li>Miscellaneous service </li></ul>
  14. 14. What is Forfaiting ? <ul><li>“ Forfait” is derived from French word “a forfait” which means forfeiting or surrender of rights </li></ul><ul><li>It is a mechanism of financing exports </li></ul><ul><ul><li>by discounting export receivables </li></ul></ul><ul><ul><li>evidenced by Bills of Exchange or Promissory Notes </li></ul></ul><ul><ul><li>without recourse to the seller (viz exporter) </li></ul></ul><ul><ul><li>carrying medium to long term maturities </li></ul></ul><ul><ul><li>on a fixed rate basis (discount) </li></ul></ul><ul><ul><li>upto 100 per cent of the contract value </li></ul></ul>
  15. 15. Forfaiting.. <ul><li>It is a highly flexible technique that allows an Exporter to grant attractive credit terms to foreign Buyers, without tying up cash flow or assuming the risks of possible late payment or default. Simultaneously, the Exporter is fully protected against interest and/or currency rates moving unfavourably during the credit period Forfaiting is a highly effective sales tool, which simultaneously improves cash-flow and eliminates risk. </li></ul>
  16. 16. Six Parties in Forfaiting <ul><li>Exporter (India) </li></ul><ul><li>Importer (Abroad) </li></ul><ul><li>Exporter’s Bank (India) </li></ul><ul><li>Importer’s/ Avalising Bank (Abroad) </li></ul><ul><li>EXIM Bank (India ) </li></ul><ul><li>Forfaiter (Abroad) </li></ul>
  17. 17. Forfaiting : 8 Steps <ul><li>Commercial contract : Exporter & Foreign Buyer </li></ul><ul><li>Commitment to Forfait BE , Pro Notes </li></ul><ul><li>Delivery of Goods by Exporter to Buyer </li></ul><ul><li>Delivery of BE / PN to Bank to EXIM Bk </li></ul><ul><li>Endorsement of BE / PN without recourse </li></ul><ul><li>Cash Payment/ thro’ a Nostro Account </li></ul><ul><li>Presentation of BE / PN to Buyer on maty </li></ul><ul><li>Payment of Debt Instrument on maturity </li></ul>
  18. 18. Benefits to Exporters <ul><li>Converts a Deferred Payment export into a cash transaction, improves liquidity </li></ul><ul><li>Frees Exporter from cross-border political or commercial risks associated </li></ul><ul><li>Finances upto 100 percent of export value </li></ul><ul><li>It is a “ Without Recourse ” finance </li></ul><ul><li>Hedges against Interest and Exchange Risks </li></ul>
  19. 19. Benefits to the importer <ul><li>The Importer can match repayments to projected revenues, allowing for grace periods. </li></ul><ul><li>The Importer can obtain 100% financing, and avoid paying out cash in advance. </li></ul><ul><li>The Importer can pay interest on a fixed rate basis for the life of the credit, which will make budgeting simpler and safer. </li></ul><ul><li>The Importer can access medium to long term financing which may be prohibitively expensive or completely unavailable locally. </li></ul><ul><li>The Importer may be able to take advantage of export subsidy schemes which are often available from the Exporter's government. </li></ul>
  20. 20. Drawbacks of forfaiting <ul><li>Non-availability for short Periods </li></ul><ul><li>Non-availability for financially weak countries </li></ul><ul><li>Dominance of western currencies </li></ul><ul><li>Difficulty in procuring international bank’s guarantee </li></ul>
  21. 21. DIFFERENCE BETWEEN FACTORING AND FORFAITING <ul><li>1.Suitable for ongoing open account sales, not backed by LC or accepted bills or exchange. </li></ul><ul><li>2. Usually provides financing for short-term credit period of upto 180 days. </li></ul><ul><li>1. Oriented towards single transactions backed by LC or bank guarantee. </li></ul><ul><li>2. Financing is usually for medium to long-term credit periods from 180 days upto 7 years though shorterm credit of 30–180 days is also available for large transactions. </li></ul>
  22. 22. DIFFERENCE BETWEEN FACTORING AND FORFAITING <ul><li>3.Requires a continuous arrangements between factor and client, whereby all sales are routed through the factor. </li></ul><ul><li>4. Factor assumes responsibility for collection, helps client to reduce his own overheads. </li></ul><ul><li>3. Seller need not route or commit other business to the forfaiter. Deals are concluded transaction-wise. </li></ul><ul><li>4. Forfaiter’s responsibility extends to collection of forfeited debt only. Existing financing lines remains unaffected. </li></ul>
  23. 23. DIFFERENCE BETWEEN FACTORING AND FORFAITING <ul><li>5. Separate charges are applied for </li></ul><ul><li>—   financing </li></ul><ul><li>—   collection </li></ul><ul><li>—   administration </li></ul><ul><li>—   credit protection and </li></ul><ul><li>—   provision of information. </li></ul><ul><li>5. Single discount charges is applied which depend on </li></ul><ul><li>—   guaranteeing bank and country risk, </li></ul><ul><li>—   credit period involved and </li></ul><ul><li>—   currency of debt. </li></ul><ul><li>Only additional charges is commitment fee, if firm commitment is required prior to draw down during delivery period. </li></ul>
  24. 24. DIFFERENCE BETWEEN FACTORING AND FORFAITING <ul><li>6. Service is available for domestic and export receivables. </li></ul><ul><li>7. Financing can be with or without recourse; the credit protection collection and administration services may also be provided without financing. </li></ul><ul><li>6. Usually available for export receivables only denominated in any freely convertible currency. </li></ul><ul><li>7. It is always ‘without recourse’ and essentially a financing product. </li></ul>
  25. 25. List of some Forfaiters <ul><li>Standard Bank, London </li></ul><ul><li>Hong Kong Bank </li></ul><ul><li>Indo Aval </li></ul><ul><li>ABN AMRO Bank </li></ul><ul><li>Meghraj Financial Services </li></ul><ul><li>Triumph International Finance India Ltd., </li></ul><ul><li>Natwest Bank </li></ul><ul><li>West LB + EXIM Bk + IFC : GTF, India </li></ul>
  26. 26. Suggested websites <ul><li>www.forfaiting.com </li></ul><ul><li>www.forfaiting.co.uk </li></ul><ul><li>www.meridianfinance.com </li></ul><ul><li>www.mezraforfaiting.com </li></ul><ul><li>www.londonforfaiting.com </li></ul><ul><li>www.eximbankindia.com </li></ul><ul><li>www.ecgcindia.com </li></ul><ul><li>www.afia-forfaiting.org </li></ul><ul><li>www.indianexportregister.com </li></ul>
  27. 27. Books on Forfaiting <ul><li>Ref : Mezra / London Forfaiting </li></ul><ul><li>Forfaiting for Exporters by Andy Ripley : Amazon.com </li></ul><ul><li>Forfaiting (1986) by Ian Guild </li></ul><ul><li>EXIM Bank of India Booklet </li></ul><ul><li>Indian Institute of Bankers, Mumbai Booklet </li></ul><ul><li>NIBM, Vinimaya </li></ul><ul><li>ICFAI – Chartered Financial Analyst </li></ul>
  28. 28. Thanks