FACTORING AND FORFAITING I.G.N.T.U.-AMARKANTAK PRESENTED BY SHANTI CHHURA M.COM 4th sem. ROLL NO. ‘10’
WHAT IS FACTORINGFactoring is a “continuing arrangement” betweena financial institution (the factor) and a businessconcern (the client) selling goods or service totrade customer’s where by the factor purchase theclients account’s ,receivables or book debt’s.
WHY WE NEED FACTORING..?1. For smooth cash flow2. For meeting working capital needs3. Overcome the situation from high cost of capital and reduced profit.
LEGAL ASPECTS OF FACTORING1. There is no codified legal framework for factoring in India2. Regulated under the law of contract3. Legal relationship largely determined by the terms of the contract
FUNCTIONS OF FACTORING1. It is purchasing and collection of the client accounts receivables (within or without resource)2. Sales ledger management3. Credit investigation and under taking of risks4. Provision of finance against debts5. Rendering consultancy
FUNDING PROCESS• Fax the copy of invoice to factor• Factors processes the invoice• Get up 80% of the invoice in 24 hours• 20% kept in reserve account• Factor receive the payment from customer• Factor deducts free from reserve account• Factor forwords the balance from reserve
TYPES OF FACTORING SERVICES Full service factoring or W/O recourses factoring:- 1. standard factoring 2. factor assume credit risk With recourses factoring:- 1. factor does not assume credit risk 2. if debtor not paid clients have to take the work for collection
CON………Maturity factoring:- 1. collection factoring 2.paid to client only when factor get moneyBulk factoring:- 1.disclosed factoring 2.provides finance after discounting the fact of assignment invoice factoring:- 1.only provides finance against invoice
CONTNIU…… 3. all other work have to be done by clientAgency factoring:- 1. factor and client share the work 2. the factor has to provides and assume riskInternational factoring:- 1. done with exporters 2. facilitated with the help of export and importer factor
MECHANICS OF EXPORT FACTORING 1. Export factor 2. Money factor 3. Import factor 4. Goods 5. money of receipt of invoice 6. Importer 7. Exporter
BENEFITS OF FACTORING Financial service collection service provision of expertise sales ledger management credit risks service
CONTIN……………. consultancy service economy in servicing off –balance sheet financing trade benefits miscellaneous services
WHAT IS FARFAITING “Forfeiting” is derived from French word a Forfait which means forfeiting or surrender of rights. It is a mechanism of financing exports- 1. by discounting export receivable. 2. evidenced by bills of exchange or , 3. promissory notes. 4. without recourse to the seller.
LEGAL EMPLICATION OF FACTORING1. When a customer presents a bill of exchange or hundi along wit his invoice, the factor must first check if there is a guideline underlying trade transaction.2. The factor must check with the client’s banker to ensure that there is no double financing.3. Regarding assignment of book debts of client’s provision of section 130 of the transfer of property act protect the interests of the factor.
CONTIN……….5. carrying medium to long-term maturities.6. of fixed rate basis (discount).7. up to 100 percent of the contract value.
SIX PARTIES IN FACTORING1. EXPORTER (INDIA)2. IMPORTER (ABROAD)3. EXPORTER BANK (INDIA)4. IMPORTER /AVALISING BANK(ABROAD)5. EXIM BANK (INDIA)6. FORFEITER (ABROAD)
FARFAITING -8 STEPS1. Commercial contract ; exporter and foreign buyer.2. Commitment to forfait BE, promissory note.3. Delivery of goods by exporter to buyer.4. Delivery of bills exchange or PN note to bank to EXIM bank.
CONT……………5. Endorsement of BE/PN without, recourses.6. Cash payment through a nitro account.7. Presentation of bills of exchange or promissory note to buyer on maturity.8. Payment of debt instrument on maturity.
BENEFITS TO EXPORTER1. Hedges against interest and exchange risks.2. Converts a deferred payment export into a cash transaction improve liquidity.3. Frees exporter from cross-border political or commercial risk associated.4. Finance up to 100 percent of export value.5. It is a “without recourses finance ”.