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Factoring

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Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing.
There are three parties directly involved: the factor who purchases the receivable, the one who sells the receivable, and the debtor who has a financial liability that requires him or her to make a payment to the owner of the invoice.
There are various types of factoring:
Recourse, Non - recourse, maturity and cross - border factoring.

Published in: Economy & Finance
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Factoring

  1. 1. FACTORING GAYATRI IYER
  2. 2. FACTORING The word “Factor” has been derived from the Latin word “Facere” which means “to make or to do or to get things done”. Factoring may broadly be defined as the relationship, created by an agreement, between the seller of goods/services and a financial institution called the factor, whereby the latter purchases the receivables of the former and also controls and administers the receivables of the former.
  3. 3. Who is a factor? A factor is a financial institution that specializes in purchasing receivables from business firms. Factor assumes the risk of collection of receivables and on the event of non payment by debtors/customers bears the risk of bad debt and losses.
  4. 4. PARTIES INVOLVED IN FACTORING The parties involved in the factoring transaction are:- a) Supplier or Seller (Client) b) Buyer or Debtor (Customer) c) Financial Intermediary (Factor)
  5. 5. CHARACTERISTICS OF FACTORING  Usually the period for factoring is 90 to 150 days. Some factoring companies allow even more than 150 days.  Factoring receivables is an ideal financial solution for new and emerging firms without strong financials. This is because credit worthiness is evaluated based on the financial strength of the customer (debtor).
  6. 6.  Factoring is considered to be a costly source of finance compared to other sources of short term borrowings.  Bad debts will not be considered for factoring. Credit rating is not mandatory. But the factoring companies usually carry out credit risk analysis before entering into the agreement.
  7. 7.  Follow-up and collection of Receivables from Clients.  Purchase of Receivables with or without recourse.  Help in getting information and credit line on customers (credit protection)  Sorting out disputes, if any, due to his relationship with Buyer & Seller. SERVICES OFFERED BY FACTORING
  8. 8. PROCESS OF FACTORING CLIENT CUSTOMER FACTOR
  9. 9. PROCESS INVOLVED IN FACTORING  Client concludes a credit sale with a customer.  Client sells the customer’s account to the Factor and notifies the customer.  Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance.  Factor maintains the customer’s account and follows up for payment.  Customer remits the amount due to the Factor.  Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.
  10. 10. MECHANISM OF FACTORING a) An agreement is entered into between the selling firm and the firm. The agreement provides the basis and the scope understanding reached between the two for rendering factor service. b) The sales documents should contain the instructions to make payment directly to the factor who is assigned the job of collection of receivables.
  11. 11. c) When the payment is received by the factor, the account of the firm is credited by the factor after deducting its fees, charges, interest etc. as agreed. d) The factor may provide advance finance to the selling firm conditions of the agreement so require.
  12. 12. TYPES OF FACTORING  Recourse Factoring  Non-recourse factoring  Maturity factoring  Cross border factoring
  13. 13. RECOURSE FACTORING  Upto 75% to 85% of the Invoice Receivable is factored.  Interest is charged from the date of advance to the date of collection.  Factor purchases Receivables on the condition that loss arising on account of non-recovery will be borne by the Client (seller firm).  Credit Risk is with the Client.  Factor does not participate in the credit sanction process.  In India, factoring is done with recourse.
  14. 14. NON-RECOURSE FACTORING  Factor purchases Receivables on the condition that the Factor has no recourse to the Client, if the debt turns out to be non- recoverable.  Credit risk is with the Factor.  Higher commission is charged.  Factor participates in credit sanction process and approves credit limit given by the Client to the Customer.  In USA/UK, factoring is commonly done without recourse.
  15. 15. MATURITY FACTORING  Factor does not make any advance payment to the Client.  Pays on guaranteed payment date or on collection of Receivables.  Guaranteed payment date is usually fixed taking into account previous collection experience of the Client.  Nominal Commission is charged.  No risk to Factor.
  16. 16. CROSS - BORDER FACTORING  It is similar to domestic factoring except that there are four parties: a) Exporter b) Export Factor c) Import Factor d) Importer  It is also called two-factor system of factoring.
  17. 17.  Exporter (Client) enters into factoring arrangement with Export Factor in his country and assigns to him export receivables.  Export Factor enters into arrangement with Import Factor and has arrangement for credit evaluation & collection of payment for an agreed fee.  Notation is made on the invoice that importer has to make payment to the Import Factor.  Import Factor collects payment and remits to Export Factor who passes on the proceeds to the Exporter after adjusting his advance, if any.  Where foreign currency is involved, Factor covers exchange risk also.
  18. 18. FACTORING COMPANIES IN INDIA  Canbank Factors Limited  SBI Factors and Commercial Services Pvt. Ltd.  The Hongkong and Shanghai Banking Corporation Ltd.  Foremost Factors Limited  Global Trade Finance Limited  Export Credit Guarantee Corporation of India Ltd.  Small Industries Development Bank of India (SIDBI)
  19. 19. STATUTES APPLICABLE TO FACTORING Factoring transactions in India are governed by the following Acts:-  Indian Contract Act  Sale of Goods Act  Transfer of Property Act  Banking Regulation Act.  Foreign Exchange Regulation Act.
  20. 20. THANK YOU

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