Factoring is a financial transaction where businesses sell their accounts receivable to a third party for immediate cash, distinctly differing from traditional bank loans by focusing on receivables' value rather than the firm's creditworthiness. The process includes several functions such as credit evaluation, debt collection, and risk assumption, along with benefits like improved liquidity and reduced debts, although it poses risks like over-dependence and unsuitability for small firms. In India, the factoring market is growing slowly due to challenges including lack of credit appraisal systems and high costs associated with debt assignments.

1. FACTORING

2. DEFINITION
Factoring is a financial transaction whereby a business sells its
accounts receivable (i.e., invoices) to a third party (called a
factor) at a discount in exchange for immediate money with
which to finance continued business.

3. FACTORING VS BANK LOAN
Factoring differs from a bank loan in three main ways.
First, the emphasis is on the value of the receivables (essentially a
financial asset), not the firm’s credit worthiness.
Secondly, factoring is not a loan – it is the purchase of a financial
asset (the receivable).
Finally, a bank loan involves two parties whereas factoring involves
three.

4. FUNCTIONS OF
FACTORING
Credit Evaluation: Assessment of credit-worthiness of customer
Sales Ledger Administration: Recording, analysing, and reporting
sales transactions
Collect Book Debts: Collection of accounts receivables from
customers as & when they become due
Assume Risk of Default: Collection of receivables from customers,
relieving the client-firm of credit risk or bad debt losses.

5. FUNCTIONS OF THE
FACTORING
Provide Finance: Providing finance to client-firm against book
debts, upto 90% of invoice value of the factored receivables
Provide Information: Advisory services on marketing strategies and
foreign collaborations, sales analysis, invoice analysis, etc
Provide Insurance: Debt Insurance to client-firm against possible
losses due to bankruptcy or insolvency

6. ADVANTAGES
1. It helps to improve the current ratio. Improvement in the
current ratio is an indication of improved liquidity. Enables better
working capital management.
2. It increases the turnover of stocks.
3. It ensures prompt payment and reduction in debt.
4. It helps to reduce the risk. Present risk in bills financing like
finance against accommodation bills can be reduced to minimum.
5. It helps to avoid collection department. The client need not
undertake any responsibility of collecting the dues from the
buyers of the goods.

7. LIMITATIONS
1. Factoring is a high risk area, and it may result in over
dependence on factoring, mismanagement, over trading of even
dishonesty on behalf of the clients.
2. It is uneconomical for small companies with less turnover.
3. The factoring is not suitable to the company’s manufacturing and
selling highly specialized items because the factor may not have
sufficient expertise to assess the credit risk.
4. The developing countries such as India are not able to be well
verse in factoring. The reason is lack of professionalism, non-acceptance
of change and developed expertise.

8. PROCESS OF
FACTORING
Step I. The customer
places an order with
the seller (the
client).
Step II. The factor and the seller
enter into a factoring agreement
about the various terms of
factoring.
Step III. Sale contract is entered
into with the buyer and the
goods are delivered. The invoice
with the notice to pay the factor
is sent along with.
Step IV. The copy of invoice
covering the above sale is sent to
the factors, who maintain the
sales ledger.
Step V. The factor prepays 80%
of the invoice value.
Step VI. Monthly Statements are
sent by the factor to the buyer.
Step VII. If there are any unpaid
invoices follow up action is
initiated.
Step VIII. The buyer settles the
invoices on expiry of credit
period allowed.
Step IX. The balance 20% less the
cost of factoring is paid by the
factor to the client.

9. TYPES OF
FACTORING
Recourse factoring
Non-recourse factoring
Advance factoring
Maturity factoring
Invoice factoring
Supplier guarantee factoring
Bank participation factoring
Cross-border factoring
Confidential & undisclosed factoring

10. RECOURSE & NON-RECOURSE
FACTORING
 Recourse Factoring: In Recourse factoring, the credit risk
remains with the client though the debt is assigned to the
factor, i.e., the factor can have recourse to the client in the
event of non-payment by the customer.
 Non-Recourse Factoring: The Non-Recourse Factoring, also
called as ‘Old-line factoring’, is an arrangement whereby he
factor has no recourse to the client when the bill remains
unpaid by the customer. Thus, the risk of bad debt is
absorbed by the factor.

11. MATURITY & ADVANCE
FACTORING
 Maturity Factoring: In maturity factoring method, the
factor may agree to pay an amount to the client for the
bills purchased by him either immediately or on maturity.
The later refers to a date agreed upon on which the factor
pays the client.
 Advance Factoring: Where the payment is made by the
factor immediately is called Advance Factoring Under this
type of factoring, the factor provides financial
accommodation apart from non-financial services
rendered by him.

12. INVOICE FACTORING
It is simply a bill discounting process.
Invoice discounting is a form of short-term borrowing often
used to improve a company's working capital and cash flow
position.
Invoice discounting allows a business to draw money against
its sales invoices before the customer has actually paid. To do
this, the business borrows a percentage of the value of its
sales ledger from a finance company, effectively using the
unpaid sales invoices as collateral for the borrowing.

13. CONFIDENTIAL AND
UNDISCLOSED FACTORING
In confidential and undisclosed factoring the arrangement
between the factor and the client are left un-notified to the
customers and the client collects the bills from the customers
without intimating them to the factoring arrangements.

14. SUPPLIER GUARANTEE
FACTORING
Supplier Guarantee Factoring is also known as ‘drop shipment
factoring’. This happens when the client is a mediator between
supplier and customer. When the client is a distributor, the
factor guarantees the supplier against the invoices raised by
the supplier upon the client and the goods may be delivered to
the customer. The client thereafter raises bills on the customer
and assigns them to the factor. The factor thus enables the
client to make a gross profit with no financial involvement at
all.

15. BANK PARTICIPATION & CROSS-BORDER/
INTERNATIONAL
FACTORING
Bank Participation Factoring: In bank participation factoring the
bank takes a floating charge on the client’s equity i.e., the
amount payable by the factor to the client in .respect of his
receivables. On this basis, the bank lends to the client and
enables him to have double financing.
Cross-border/International Factoring: In domestic factoring,
there are 3 parties involved – customer, client and factor. But in
international factoring, 4 parties are involved, namely –
exporter(client), importer(customer), export factor, and import
factor.

16. FINANCIAL ASPECTS

17. FACTORING
&
BALANCE
SHEET

18. FACTORING & BALANCE
SHEET
Impact of Factoring on Balance Sheet:
 Reduction of Current Liabilities.
 Improvement in Current Ratio and Efficiency.
 Higher credit standing.
Reduction of cost and expenses.

19. FACTORING AND P&L
ACCOUNT
The Benefits of factoring in terms of the profit and loss account
are analyzed as under:
The factor performs basis functions like administration of
seller’s sales ledger, credit control, collection of dues, etc. This
saves the administration costs.
The improved liquidity position enables the firm to honour its
obligations without any delay.
The improved credit standing helps the firm to get the benefits
of lower purchase price, longer credit period from suppliers,
trade discount on bulk purchases, cash discount on early
payment, better market standing, quicker sanction of loans and
advances, and better terms and conditions while borrowing etc.

20. FACTORING CHARGES
Finance Charge: Finance charge is computed on the prepayment
outstanding in the client’s account at monthly intervals. Finance
charges are only for financing that has been availed. These
charges are similar to the interest levied on the cash credit
facilities in a bank.
Service fee: Service charge is a nominal charge levied at monthly
intervals to cover the cost of services, namely, collection, sales
ledger management, and periodical MIS reports. Service fee is
determined on the basis of criteria such as the gross sales value,
number of customers, the number of invoices and credit notes,
and the degree of credit risk represented by the customers or
the transaction.

21. PROSPECTS OF
FACTORING IN INDIA

22. THE KALYANASUNDARAM
REPORT
In 1988, RBI formed a committee headed by CS Kalyansundaram,
a former managing director of the State Bank of India SBI to
examine the need for and the scope of factoring organizations in
India. The committee submitted its report in December 1988 and
recommended introduction of factoring services in India. The RBI
advised banks to take up factoring activity through a subsidiary.

23. NEED FOR FACTORING
SERVICES IN INDIA
There is sufficient scope for the introduction of factoring
services in India, which would be complementary to the services
provided by banks.
The introduction of export factoring services in India would
provide an additional facility to exporters.
With a view to attaining a balanced dispersal of risks, factors
should offer their services to all industries and all sectors of the
economy.

24. RBI GUIDELINES
Banks are permitted to set up separate subsidiaries/invest in
factoring companies.
Should not engage in financing of other companies or other
factoring companies.
Investment of a bank cannot exceed in the aggregate 10% of paid-up
capital and reserves of the bank.
According to the RBI guidelines (2010), banks now with the prior
approval of RBI can form subsidiary companies for undertaking the
factoring services and other incidental activities.

25. SBI FACTORS AND
COMMERCIAL SERVICES
The State Bank of India, in association with the State Bank of
Indore, the State Bank of Saurashtra, SIDBI, and the Union Bank
of India set up the SBI Factors and Commercial Services in
February 1991.
SBI Factors commenced operations from April 1991. SBI factors
was the first factoring company to be set up in India. It has a
45% market share in this business. SBI Factors offers domestic,
export, and import factoring services.

26. SBI FACTORS AND
COMMERCIAL SERVICES
SBI factors offers two types of products under domestic
factoring:
Bill2Cash: - The seller invoices the goods to the buyer, assigns
the same to SBI factors, and receives prepayment up to 90
percent of the invoice values immediately.
Cash4Purchase: Facilitates instant payment for purchases made
and is generally sanctioned in conjunction with receivable
factoring facility or export factoring.

27. CANBANK FACTORS LTD.
Jointly promoted by the Canara Bank, Andhra Bank and SIDBI in
August,1992.
Its Rs. 10 crore paid-up capital was contributed in the
proportion of 60:20:20 by three promoters respectively.
Initially operated in the south zone but regional restrictions on
their operations were subsequently removed by the RBI.
Main services provided by the Canbank Factors Ltd are
domestic factoring and invoice discounting.

28. REASONS FOR SLOW
GROWTH
The overall worldwide growth in factoring is estimated at 12%.
Europe has the largest market representing 64% of the world
volumes with a growth of 18% during the year. America's
growth was 10%, whereas Australia recorded impressive growth
of 40%. Asia saw a fall in volume.
The growth trends mentioned above support the fact that there
is enormous scope for expansion worldwide and India is no
exception to this.
The potential in India is estimated at an annual turnover of Rs.
15000 to Rs. 20000 crore, but large portion is untapped.

29. REASONS FOR SLOW
GROWTH
Lack of a credit appraisal system and authentic information about
customers and clients restricts the growth of this business.
Higher stamp duty on assigning of debt increases the cost of the
client which reduces factoring arrangements.
Non availability of permission to factoring companies for raising
their debt restricts their financing capacity and thereby growth of
the market.
Being registered as NBFCs, factoring companies are not eligible
for refinance which limits the extension of this facility to the
exporters on open account sales. This restricts the growth of the
market.

30. THANK
YOU
SUBMITTED BY:
KUSHAL WALIA UM 10905
PUJIT SINGH UM 10304
SHIVAM MIGLANI UM 10307
SAHIB SINGH UM 10809