Factoring forfaiting


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Factoring forfaiting

  1. 1. Risks in International Trade
  2. 2. New Techniques… <ul><li>Factoring </li></ul><ul><li>Forfaiting </li></ul>
  3. 3. What is Factoring? <ul><ul><li>FACTORING is a “continuing arrangement” between a financial institution (the factor) and a business concern (the client) selling goods or services to trade customers (the customer) whereby the factor purchases the client’s accounts receivables/book debts </li></ul></ul>
  4. 4. Factoring Mechanism
  5. 5. Factoring Services <ul><li>Besides purchase of accounts receivables, a factor may provide a wide range of services such as: </li></ul><ul><ul><li>a) Sales Ledger administration             b) Debt Collection services        c) Credit Information services          d) Advisory services </li></ul></ul>
  6. 6. Non-Recourse Factoring <ul><li>It gives protection against bad debts to the client </li></ul><ul><li>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 </li></ul><ul><li>It is popular in developed countries </li></ul>
  7. 7. Cross Border Factoring / International Factoring <ul><li>In the international business transactions, factoring services are provided by factors of both countries </li></ul><ul><li>This is known as Cross Border Factoring / International Factoring </li></ul>
  8. 8. International Factoring <ul><li>Under Export Factoring, a factor in India factors export invoices drawn on overseas buyers and prepays the client an agreed percentage of the invoice value immediately </li></ul><ul><li>The factor handling the collection of export receivables of clients (exporters) is called Export Factor (EF) and the factor in buyer’s country who undertake collection and credit protection services is called Import factor </li></ul>
  9. 9. International Factoring <ul><li>In Export Factoring, the Export Factor appoints an Import Factor, who provides credit protection / exposure limits for a particular importer and only upon such approval the Export Factor provides financial assistance to the Indian Exporter </li></ul><ul><li>In view of this there is no requirement of a letter of credit or a credit insurance cover </li></ul>
  10. 11. Benefits to Exporters <ul><li>Elimination of the cost and delays experienced in transacting business under LC </li></ul><ul><li>The import factor offers credit risk protection in case buyer does not pay invoices with in 90 days of due date </li></ul><ul><li>ECGC policy cost can be saved. There is reduction is administrative cost as the exporter will be dealing with only one Export Factor irrespective of the number of countries involved. </li></ul>
  11. 12. Benefits to Exporters <ul><li>The exporter can obtain valuable information on the standing of the foreign buyers on trade customs and market potential in order to expand his business </li></ul><ul><li>The following up of receivables by import factor will speed up the collections </li></ul><ul><li>Usually, as factors provide finance up to 90% on export invoices, the exporter has an improved cash flow and his liquidity improves markedly </li></ul>
  12. 13. Benefits to Importers <ul><li>He can pay invoices in the country locally </li></ul><ul><li>He deals with the local agency, i.e. the Import Factor </li></ul><ul><li>Minimum documentation required </li></ul><ul><li>The cost of Letters of Credit and delay on account of </li></ul><ul><li>LC’s are eliminated. All communication is in his own </li></ul><ul><li>language. </li></ul>
  13. 14. Factoring – Global Scenario <ul><li>Factoring volume increased from 724 Bn Euro in 2002 to 1,325 Bn Euro in 2008. </li></ul><ul><li>Total of America and Europe accounted for approx 80% of the global factoring business </li></ul><ul><li>Asia’s factoring volume accounts for approx 18% of global factoring volume </li></ul><ul><li>China, Japan, and Taiwan account for approx 90% of the Asia’s factoring volume </li></ul><ul><li>India share in total factoring business of Asia in only 2.2%. </li></ul>
  14. 15. FACTORING AROUND THE WORLD ( in Millions of Euro)   2003 2004 2005 2006 2007 2008 2009 Europe 546,935 612,504 715,486 806,983 932,269 888,533 876,649 Americas 104,162 109,619 135,240 140,493 149,673 154,195 142,013 Africa 5,840 7,586 6,237 8,513 10,705 13,263 14,796 Asia 88,933 111,478 135,470 149,606 174,244 235,512 209,991 Australasia 13,979 18,417 23,380 27,853 33,780 33,246 40,110 TOTAL 759,849 859,604 1,015,813 1,133,448 1,300,671 1,324,749 1,283,559
  15. 16. Forfaiting <ul><li>The word forfaiting is derived from the French term “ a forfait ” which means “relinquishing a right” </li></ul><ul><li>Forfaiting is the discounting of international trade receivable on a 100% &quot;without recourse&quot; basis </li></ul><ul><li>It is a form of suppliers credit involving the sale or purchase of receivables falling due at some future date </li></ul>
  16. 17. Forfaiting <ul><li>Traditionally, forfaiting is fixed interest rate and medium term (3-5 years) financing </li></ul><ul><li>Forfaiting is generally suitable for high value exports like heavy machinery, capital goods, consumer durable, vehicles, bulk commodities, consultancy and construction contracts and project exports </li></ul>
  17. 18. Benefits <ul><li>Enhances competitive advantage </li></ul><ul><li>Ability to provide vendor financing making products more attractive </li></ul><ul><li>Enables the exporter to do business in risky countries </li></ul><ul><li>Increases cash flow. Forfaiting converts a credit-based transaction in to a cash transaction </li></ul>
  18. 19. Benefits <ul><li>Elimination of the following Risks associated with cross border transactions: </li></ul><ul><li>  </li></ul><ul><ul><li>Commercial Risk - The risk of non-payment by a non-sovereign or private sector buyer or borrower in his home currency arising from insolvency </li></ul></ul><ul><ul><li>Political Risk - The risk of the borrower country government actions, which prevent or delay the repayment of export credits </li></ul></ul>
  19. 20. Benefits <ul><li>  </li></ul><ul><ul><li>Transfer Risk - The risk of an inability to convert local currency into the currency in which debt is denominated </li></ul></ul><ul><ul><li>Interest Risk - The risk of interest rate fluctuations during the credit period of the transaction </li></ul></ul><ul><ul><li>Exchange Risk - The risk of exchange rate fluctuations </li></ul></ul>
  20. 21. Thank you
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