2. Factoring
• Factoring is a transaction in which a business
sells its invoices, or receivables, to a third-
party financial company known as a “factor.”
The factor then collects payment on those
invoices from the business’s customers.
• The main reason that companies choose to
factor is that they want to receive cash quickly
on their receivables, rather than waiting
3. • Factoring allows companies to quickly build up
their cash flow, which makes it easier for
them to pay employees, handle customer
orders and add more business.
4. Mechanism of Factoring
• 1. Customer places an order with the client for
goods and services on credit. Client delivers
the goods and sends the invoices to the
customers.
• 2. Client assigns invoice to the factor.
• 3. Factor makes prepayment up to 80 % and
sends periodical statements
5. • 4. Monthly statement of accounts to customer
and follow up.
• 5. Customer makes payment to factor.
• 6. Factor makes balance 20% payment on
realization to the client
6. • Factor – Special/expert of handling
receivables who provides the following two
services to its clients:-
1.Management of receivables
2.Loan against Receivables
(Loan or Advance or Finance)
7. Cost and benefits of Factoring
• Cost –
• (a)Commission for management of
receivables
• (b) Interest for financing of receivables
• Benefits
• (a) Reduction in the collection cost, bad debts,
collection cost.
• (b) Release of working capital blocked in
receivables due to additional finance.
8. • Factoring
• Factoring is the continuing arrangement
between a financial intermediary known as
factor and business concern (the client )
whereby the factor purchases the client’s
accounts receivables/book debts.
• This relation enables the factor to control the
credit extended to the customer and
administer the sales ledger.
9. Types of Factoring
• Recourse factoring –
• Recourse factoring means the credit risk of
the customers of the business is assumed by
the business only and not by the factor.
• Essentially, in this type of factoring the factor
is only a financing and collecting agent for the
business. .
10. • Non-recourse factoring allows a company to
sell its invoices to a factor without the
obligation of absorbing any unpaid invoices.
• If the trade debtor fails to make a payment
the factor can not recover this amount from
the client.
• High factoring charges are high
• Mostly found in developed countries where
the high credit rating services available.
11. • Advance factoring - Under advance factoring
arrangement, money is paid by the factor to
the business in advance.
• However, not the entire amount is paid in
advance, but a certain percentage of the
receivables is paid in advance.
• The balance amount is paid on the guaranteed
payment date.
12. • Maturity factoring,
• There are factoring services which offer the
benefit of collection mainly.
• Maturity factoring is that kind of factoring where
the invoice amount is paid after the realization
from the customer.
• The job of a factor is to collect the money from
the customer. Here, the charges of factoring
would also be less as the component of interest
would be dropped.
13. • For example, an invoice maturing on
25th
August, 2016 shall be either paid off
25th
August 2016 or any other date after
maturity decided between the client and the
factor.
14. Old Line factoring
• Aka Full factoring
• Provides entire spectrum of services such as
collection, credit protection, sales ledger
administration
15. DOMESTIC AND CROSS BORDER
FACTORING
• Factor giving the services of purchase,
management, funding and collection of accounts
receivable in domestic territory is termed as
domestic factoring.
• Here three parties are involved i.e. buyer, seller,
and factor who are located in the same country.
• Whereas, if the same services are provided in
international markets then it is termed as cross-
border factoring.
• Here four parties are involved i.e. exporter,
importer, export factor and import factor.
16. Forfaiting
• Forfaiting is a means of financing used by
exporters that enables them to receive cash
immediately by selling their medium-
term receivables (the amount an importer owes
the exporter) at a discount.
• The exporter also eliminates risk by making the
sale without recourse, which means that the
exporter has no liability regarding possible
default by the importer on paying the
receivables.
17. • The forfaiter is the individual or entity that
purchases the receivables. The importer is
then obligated to pay the receivables amount
to the forfaiter.
• A forfaiter is typically a bank or a financial firm
that specializes in export financing.
•
18. • Forfeiting involves large projects, large value
transactions, capital goods and commodities
and offers a credit period of a long period
such as five years.
• Forfeiting is popular among companies and
exporters that sell high-value capital goods as
it offers payment security.
19.
20. Types of Factoring
• 1. Recourse Factoring
• Bad debt will be borne by the company and
not by Factor.
• 2. Non Recourse Factoring (more comission)
• Bad debt will be borne by the factor not by
the company. (Savings of the bad debt will
definitely occur to the company).
22. • 3. Bulk or Agency Factoring – Factor only
finances the receivables. Management of
receivables is managed by the company.
• 4. Non Notification Factoring – The customers
and the company are not notified about the
appointment of factor.
24. • Lease is a contract between Lessor (owner of
asset), and a Lessee (User of asset).
• Under the contract the owner gives the right
to use the asset to the user, over an agreed
period of time, for a consideration called
Lease Rentals.
• In long lease contracts there is an option to
renew the Lease contract.
26. Operating Lease
• Short term Cancellable Lease agreements are
known as Operating Leases.
• Used in Convenience and instant services.
• Eg. Tourist renting a car
• Lease contract for office equipments car,
trucks, Hotel room etc.
• Lessor is generally responsible for
maintenance and insurance of the asset.
27. Financial Lease
• Long term, non cancellable lease contracts
• Eg – Plant , machinery, land, building, ships
• Insurance and maintenance responsibility of
Lessee
28. Financial Lease
• A financial lease is a method used by a
business for acquisition of equipment with
payment structured over time.
• To give proper definition, it can be expressed
as an agreement wherein the lessor receives
lease payments for the covering of ownership
costs.
• The lessee holds the responsibility of
maintenance, taxes, and insurance.
29.
30. Merchant Bank
• An institution which covers wide range of
activities such as management of customer
services, portfolio management, credit
syndication, Insurance, counselling etc
31. Merchant Bank
• SEBI defines Merchant banker as:-
• Merchant banker is a person who is engaged
in the business of issue management, either
by making arrangements regarding selling,
buying or subscribing to securities, or acting as
a manager, consultant or advisor or rendering
corporate advisory services in relation to such
issue management.
32. • It is mandatory to appoint a merchant banker in
case of public issues, rights issues and buybacks.
• Merchant bankers facilitate the issue process by
directing and coordinating the activities with
underwriters, registrars and bankers.
• Merchant bankers appropriately do the pricing
and marketing the issue and complying with the
SEBI guidelines.
• Merchant banker can not hold any public deposit.
33. • SBI first indian merchant banker to set up
Merchant banking division in 1972
34. • Some leading Merchant bankers registered
with SEBI are:
• SBI capital market Ltd.
• ICICI securities Ltd.
• Kotak Mahindra capital company Ltd.
• Reliance securities etc
35. Services
• Project counseling (Checking
viablility/feasibility, project reporting, getting
loan
• Loan Syndication
• Corporate counseling - Counsels the
companies in project management, capital
restructuring, raising capital, managing
working capital, lease financing
37. • The pre issue management is divided in to:-
1.Issue through Prospectus, and Private
placement
2.Marketing and Underwriting
3.Pricing of issue (Book building, Upper band
Lower band, Issue at Premium/discount/face
value)
38. • Post Issue Obligations
• Submitting the post issue monitoring reports.
• Redressal of the investor grievances.
• Maintaining a close coordination with the
intermediaries.
• Ensuring full subscription of the issue
• Finalising basis of the allotment and allotment
procedure.
40. • A mutual fund is a common pool of money
into which investors place their contributions
that are to be invested in different types of
securities in accordance with the stated
objective.
43. Open ended Funds
• An open-end fund is a type of mutual fund that
does not have restrictions on the amount of units
the fund can issue.
• Purchasing units creates new ones, whereas
selling units takes them out of circulation.
• Units are bought and sold on demand at their net
asset value (NAV), which is based on the value of
the fund’s underlying securities and is calculated
at the end of the trading day.
44.
45.
46.
47.
48.
49.
50. Advantages of Mutual Funds
• Portfolio diversification: It enables him to
hold a diversified investment portfolio even
with a small amount of investment like Rs.
2000/-
• Professional management: The investment
management skills, along with the needed
research into available investment options,
ensure a much better return as compared to
what an investor can manage on his own.
51. • Reduction/Diversification of Risks: The
potential losses are also shared with other
investors.
• Reduction of transaction costs: The investor
has the benefit of economies of scale; the
funds pay lesser costs because of larger
volumes and it is passed on to the investors.
52. • Wide Choice to suit risk-return profile: Investors
can chose the fund based on their risk tolerance
and expected returns.
• Liquidity: Investors may be unable to sell shares
directly, easily and quickly. When they invest in
mutual funds, they can cash their investment any
time by selling the units to the fund if it is open-
ended and get the intrinsic value. Investors can
sell the units in the market if it is close edended
fund.
53. • Convenience and Flexibility: Investors can
easily transfer their holdings from one scheme
to other, get updated market information and
so on.
• Funds also offer additional benefits like
regular investment and regular withdrawal
options.
54. • Transparency: Fund gives regular information
to its investors on the value of the
investments, the proportion invested in each
class of assets and the fund manager's
investment strategy and outlook
• Tax Saving
57. • The term consumer finance refers to the
activities involved in granting credit to
consumers to enable them to possess goods
meant for everyday use.
•
58.
59. Sources of Consumer Finance
• Traders : The predominant agencies that are
involved in consumer finance are traders.
They include sales finance companies, hire
purchase and other such financial institutions.
• Commercial Banks: Commercial Banks
provide finance for consumer durables.
60. • Credit Card Institutions: These institutions
arrange for credit purchase of consumer
goods through respective banks which issue
the credit cards.
• The buyer receives monthly statement from
the card issuing bank or company and the
amount is to be paid within a period of 20 to
45 days.
61. • (NBFC’s):Non banking Financial companies
constitute an important source of consumer
finance.
• Credit Unions: A credit union is an association of
people who agree to save their money together
and in turn provide loans to each other at a
relatively lower rate of interest. These are caller
co-operative credit societies. They are non profit
deposit taking and low cost credit institutions.
62. Advantages of Consumer
Credit(Finance)
• Enjoying possession : An important benefit of
consumer credit is that it allows people to
enjoy possession of goods without having to
pay for them immediately.
• Convenient mode : Consumer credit offers a
convenient mode of acquiring consumer
durables.
63. • Meeting emergency : Consumer credit is useful
in meeting emergencies such as illness, accident
and death which involve unexpected expenses.
• Maximization of revenues: Consumer credit
facilitates speedy disposal of goods which would
have remained unsold in the absence of credit
facility to consumers. This helps in increased
sales and profits through credit sales.
64. V
• Accelerates industrial investment: Consumer
credit accelerates investment in consumer
durable industry giving rise to growing level of
income and employment.
• Enhanced living standard : consumer credit
enables people of limited means to acquire
goods to enhance their general standard of
living.
65. • Promoting Economic development :
Consumer credit promotes higher levels of
investment, employment and income thus
raising the effective demand and promoting
higher standard of growth and development.
66.
67. • Rate of interest : the effective rate of
consumer finance is much higher than the
rates applicable to business finance. This is
because the loans are granted based on the
personal integrity of the customer.
69. • A commercial bank is a financial institution
which performs the functions of accepting
deposits from the general public and giving
loans for investment with the aim of earning
profit.
70. Services provided by Commercial
Banks
• 1. Advancing of Loans
• Banks are profit oriented business
organizations. So they have to advance loan to
the public and generate interest from them as
profit.
• After keeping certain cash reserves, banks
provide short-term, medium-term and long-
term loans to needy borrowers.
71. • 2. Overdraft
• Sometimes, the bank provides overdraft
facilities to its customers through which they
are allowed to withdraw more than their
deposits. Interest is charged from the
customers on the overdrawn amount.
72. • 3. Discounting of Bills of Exchange
• This is another popular type of lending by the modern
banks. Through this method, a holder of a bill of
exchange can get it discounted by the bank, in a bill of
exchange, the debtor accepts the bill drawn upon him
by the creditor (i.e., holder of the bill) and agrees to
pay the amount mentioned on maturity.
• After making some marginal deductions (in the form of
commission), the bank pays the value of the bill to the
holder. When the bill of exchange matures, the bank
gets its payment from the party, which had accepted
the bill.
73. • 4. Cheque Payment
• Banks provide cheque pads to the account
holders. Account holders can draw cheque
upon the bank to pay money. Banks pay for
cheques of customers after formal verification
and official procedures.
74. • Foreign Currency Exchange
• Banks deal with foreign currencies. As the
requirement of customers, banks exchange
foreign currencies with local currencies, which
is essential to settle down the dues in the
international trade.
75. • Consultancy
• Modern commercial banks are large
organizations. They can expand their function
to consultancy business. In this function,
banks hire financial, legal and market experts
who provide advice to customers in regarding
investment, industry, trade, income, tax etc.
76. • Remittance of Funds
• Banks help their customers in transferring
funds from one place to another through
cheques, drafts, etc.
77. • Credit cards
• A credit card is cards that allow their holders
to make purchases of goods and services in
exchange for the credit card’s provider
immediately paying for the goods or service,
and the card holder promising to pay back the
amount of the purchase to the card provider
over a period of time, and with interest.
78. • ATMs Services
• ATMs replace human bank tellers in
performing basic banking functions such as
deposits, withdrawals, account inquiries. Key
advantages of ATMs include:
• 24-hour availability
• Elimination of labor cost
• Convenience of location
79. • Debit cards
• Debit cards are used to electronically
withdraw funds directly from the cardholders’
accounts. Most debit cards require a Personal
Identification Number (PIN) to be used to
verify the transaction.
80. • Online banking
• Online banking is a service offered by banks that
allows account holders to access their account data via
the internet. Online banking is also known as “Internet
banking” or “Web banking.”
• Online banking through traditional banks enable
customers to perform all routine transactions, such as
account transfers, balance inquiries, bill payments, and
stop-payment requests, and some even offer online
loan and credit card applications. Account information
can be accessed anytime, day or night, and can be
done from anywhere.
81. • Mobile Banking
• Mobile banking (also known as M-Banking) is
a term used for performing balance checks,
account transactions, payments, credit
applications and other banking transactions
through a mobile device such as a mobile
phone or Personal Digital Assistant (PDA),
82. • Accepting Deposit
• Accepting deposit from savers or account
holders is the primary function of a bank.
Banks accept deposit from those who can
save money but cannot utilize in profitable
sectors. People prefer to deposit their savings
in a bank because by doing so, they earn
interest.