2. What is Factoring?
Factoring is a financial transaction in which a
business sells its accounts receivable (i.e,
invoices) to a factor at a discount.
It is the conversion of credit sales into cash.
a financial institution (factor) buys the accounts receivable of a
company (Client) and pays up to 80%(rarely up to 90%) of the amount
immediately on agreement.
Factoring company pays the remaining amount (Balance 20%-finance
cost-operating cost) to the client when the customer pays the debt.
Collection of debt from the customer is done either by the factor or client
3. Case Study #1... James Manufacturing, Inc.
James Manufacturing is a small builder
of boat trailers and related products.
Bill James, its owner, was awarded a
contract to supply the Florida Fish
and Wildlife Conservation Commission
with 72 new trailers to replace old
units that were rusty and failing.
Each trailer was $2,900 for a total value of
$208,800.
James had 20 trailers in inventory to begin delivery and the contract called
for all trailers to be delivered within 60 days.
4. Problems Faced By James:•It had little excess capital.
•The state pays slowly and Bill James knew he would not
receive payment for the 20 trailer.
•He needed cash to order bulk steel and hardware to build the remaining 52
trailers and to be able to deliver them by the 60 day purchase order deadline
Solution:•He visited a local community bank where the loan officer explained him the
need of factoring.
•James was introduced to bank’s factoring officer.
•An account was immediately established to provide working capital to meet the
order.
5. RESULT
•
Through factoring, James would receive an initial advance from the
bank of $46,400 (80%) on the $58,000 invoice after delivery of the 20
finished trailers in inventory.
•
That advance of $46,500 was enough to then buy the bulk steel and
hardware to complete the other 52 trailers in time.
•
After the state paid for the 20 trailer shipment, the bank would then
give James the $11,500 not initially advanced less a small factoring
fee for services.
6. Places an order
The factoring arrangement was exactly what James needed to take his small
company to the next level.
It speed up the company's cash flows.
There were no requirements for lengthy lending committee meetings to approve
the credit line increase
8. BETTY'S BUILDING MAINTENANCE SERVICE, INC.
PROVIDES EXTERIOR BUILDING MAINTENANCE
INCLUDING PRESSURE WASHING AND WINDOW CLEANING
Betty receives many opportunities in the past as the contracts are relatively
large and both the county and city take 45 days to make payment for services
performed.
Betty's company has few hard assets to be used as collateral and she
cannot secure any form of business loan
Betty was contacted by Bill, a loan broker and small business consultant,
who explained to her the benefits of factoring
Bill then introduced Betty to a factor's business development officer who
quickly forwarded a proposal for a factoring arrangement whereby Betty
would be charged a flat rate of 4% of the invoice face amount for the first 45
days the invoice was outstanding and 1% for each fifteen days thereafter.
9.
Betty's profit margin of 25% easily absorbed the factor's fee and left her
with a 20% or greater profit margin.
Betty executed her factoring agreements and established her client
relationship with the factor. She
was awarded a $25,000 monthly
contract to provide maintenance on five local county buildings. She also
won the bid for maintenance on the City Hall for over $100,000 per year.
This makes factoring a perfect
Working capital solution for
new startups and companies in
their early stage of business
development that have not
yet developed a credit history.
10. ORIGIN
Came into existence in the year 1920
It was not an organised sector that time
Association of British Factors(ABF) came in 1976
Nearly 90% of global factoring turnover comes from USA &
European countries
RBI appointed the C.S.Kalyanasundaram Committee (1988)
It suggested to start factoring by a bank through its subsidiary
11. AS OF TODAY,
Worldwide, factoring volume is more than USD 700 billion a year
Spread over nearly 60 countries and covering more than 1,00,000
businesses.
Particularly in developed countries, factoring is an accepted way of
conducting business.
12. FCI (FACTORS CHAIN INTERNATIONAL)
FCI is a global network of leading factoring countries
It helps its members achieving competitive advantage through:
A global network
Modern & effective communication system
Reliable legal framework
Standard procedures
Universal quality
World wide promotion
Training programmes
13. FCI MEMBERS
Can Bank Factors Ltd. - Bangalore www.canbankfactors.com
CitiBank – Mumbai
ECGC of India Ltd.- Mumbai
Foremost Factors Ltd.- New Delhi www.foremostfactors.net
Global Trade Finance Ltd.- Mumbai www.gtfindia.com
SBI Factors & Commercial Services Pvt.Ltd – Mumbai www.sbifactors.com
The HSBC Ltd. - Mumbai www.hsbc.co.in
14. OFFSHEET
(Rs. crores)
Current Liabilities (CL)
Current Assets (CA)
Bank borrowing against
Inventory
100
i. Inventory
70
Receivables
80
ii. Receivables
50
Other current assets
20
120
Other current liabilities
30
150
Net Working Capital (CA-CL) 50
Total Current Liabilities 200
Original Current Ratio 1:33: 1 (200 : 150)
Total Current Assets 200
15. BALANCE SHEET: POST-FACTORING POSITION
(Rs. crores)
Current Liabilities (CL)
Current Assets (CA)
Bank borrowing against
Inventory
100
i. Inventory
70
Recievables(due frm factor)
16
Other current Liabilities
16
Other current assets
20
Total Current Assets
136
86
Net Working Capital (CA-CL) 50
Total Current Liabilities
136
New Current Ratio 1.581: r-(136 : 86)
16. IMPACT OF FACTORING ON BALANCE SHEET
Improvement in Current Ratio.
The current ratio improves from 1.33: 1 (before factoring) to 1.58 : 1.
The new current ratio is better for the client and his credit rating goes
up before public eye.
Reduction in Current Liabilities.
An advance payment of Rs. 64 crores (i.e. 80% of 80 crore) is
utilised in repaying the bank borrowings against receivables to the
tune of Rs. 50 crores and for meeting other current liabilities to the
tune of Rs. 14 crores.
17.
18. CASE STUDY
An exporter recently approached AIB Trade Finance Services with a common problem. The
company was spending a lot of time chasing their debtors for payment. The Financial
Director complained that despite having delivered their goods to the buyer, they were
incurring considerable expense in staff time and communication costs in order to chase their
money.
Despite the buyer's agreement to pay at the end of the month following the invoice date, the
exporter found that payment was actually received 30 to 60 days later. In addition the time
spent chasing the payment was creating additional costs as well as increasing the time spent.
CAN THE EXPORTER REGAIN CONTROL?
AIB Trade Finance Services advised the company to consider using a Documentary
Collection to obtain payment, or a commitment to pay from the buyer. This meant the
exporter was encouraged to send their shipping documents to the buyer through the banking
system accompanied by a Bill of Exchange* drawn on the buyer with a payment date at the
end of the month following the date of shipment.
The exporter instructed AIB Trade Finance Services, who in turn instructed the buyer's bank,
to only release the shipping documents to the buyer against their acceptance of the Bill of
Exchange and their agreement to make the payment on the due date. In addition AIB Trade
Finance Services was able to instruct the buyer's bank to hold the accepted Bill of Exchange
and present it to the buyer for payment on the due date.
19. THE BENEFITS FOR EXPORTERS WHEN USING DOCUMENTARY
COLLECTIONS.
The use of a Documentary Collection gives an exporter greater control over their goods and
when they get paid.
•The exporter can use the banking system to obtain the buyers commitment to pay.
•The exporter can also use the banking system to collect the debt.
•The exporter can retain control over their shipping documents until the buyer has paid or
agreed to pay.
•Documentary Collections are a relatively inexpensive payment mechanism.
For further protection and control the exporter could have requested that the buyer's bank
guarantee the buyer's commitment to pay. This provides additional benefits as follows:
•Gives greater security as the buyer's bank has added its guarantee that the Bill of Exchange
will be paid at maturity.
•It eliminates the risk of non-payment in the event of the buyer having difficulties.
•It also provides an opportunity to obtain finance through non-recourse Bill discounting.
CONCLUSION
This is an acceptable trading option for well known and financially secure customers in
developed economies, it may not be appropriate for customers with weaker financial
positions or located in less developed economies. The Documentary Collection can provide
some additional security for the exporter whilst ensuring that the payment process is not
unduly expensive or complex.
21. Close Invoice Finance Limited started life as a small factoring company called
Century Factors, based above a car showroom in Yeovil, Somerset. Century became
one of the first acquisitions by Close Brothers and in 1993 its name was changed to
Close Invoice Finance Limited.
When the company started in 1984, it had just 20 clients. Today it provides finance
services to over 1,000 clients and has won many accolades. Close Invoice Finance
was named Best Factoring & Invoice Discounting Provider from 2006 to 2009 by
Business Moneyfacts. In October 2008 Close Invoice Finance Limited won a
Global Business Excellence (GBE) Award for Outstanding Technology Solutions
for its IDeal invoice discounting and factoring system. In November 2008 Close
Invoice Finance Limited won one of the most prestigious awards in the IT industry:
a Computing Award for Excellence 2008 from Computing magazine, winning the
category of Best Small Business IT Strategy for its IDeal invoice discounting and
factoring system.
Close Invoice Finance is a distinct business group within the Close Brothers Group,
one of Europe’s most enterprising merchant banks and a FTSE top 250 listed
company. Close Invoice Finance continues to grow at a rate that is ahead of the
industry average and contributes more than 7% of the Close Brothers Group’s total
revenue.
22.
Great expectations lead to greater achievements:The invoice discounting (asset based lending) solution that Close
Invoice
To enable the business to work with customers whose revenues were
otherwise too small or their ledger composition too complex or highrisk to service safely and cost-effectively.
Asset based lending to provide a transparent view of the underlying
debt structure of clients through invoice level access.
To improve service levels and provide self-service options for clients
(through asset based lending).
Receivables financing to achieve greater account management
efficiencies, Therefore, lower costs in order to be able to offer
customers more flexible and more competitive pricing.
To increase overall control and significantly reduce risk (through asset
based lending).
23. CASE STUDY: THE TRANSACTION:
TESCO/FOX FRESH EXPORT
ZIMBABWE
Under
this forfaiting transaction, the local company (Fox Fresh exports Zimbabwe)
airfreights its flowers or fresh vegetables to a foreign buyer, in this case, Tesco
Supermarkets in the United Kingdom.
Tesco
issues a tenored promissory note to the exporter. These notes are then
avalized by Tesco’s bank. Once the aval is added, the exporter, instead of waiting
for 30 to 180 days for payment and/or borrowing money on the local market to
finance his working capital needs, can approach a bank for immediate payment in
foreign currency less a discount rate.
The
exporter would then use the confirmed receivables backed by the aval of the
bank as security and would thus receive payment 2 – 4 days after exporting.
24. PROCEDURE :
Fox
Fresh Exports Zimbabwe receives confirmation of
value of their exports and settlement dates from Tesco.
Fox Fresh Exports Zimbabwe instructs Tesco to issue
promissory notes to be paid through its bank to
Rabobank.
Tesco issues avalized promissory notes to the exporter.
Rabobank pays Fox Fresh Exports Zimbabwe less the
discount (5%).
In 90 days Tesco’s bankers make final settlement with
Rabobank.
25. ADVANTAGES IN THE TESCO/FOX FRESH
EXPORT ZIMBABWE TRANSACTION
To the buyer (Tesco):
Enjoy a bit of credit terms
The buyer can now get the
product, sell, receive money and invest it before final
settlement in 90 – 180 days.
2. To the exporter (Fox Fresh Exports Zimbabwe):
Paid within 7 days of exporting.
This facility does not require any rigorous credit
rating for Fox Fresh Exports Zimbabwe .
1.
26. 3. To the bank (Rabobank):
Does not need to worry about country risk (Zimbabwe
risk).
Facility is based on a transaction basis and the risk that
Rabobank is taking is with the foreign buyer Tesco,
and not with Fox Fresh Exports Zimbabwe.
4. To the country (Zimbabwe):
Zimbabwe, is now collecting its foreign currency
receipts faster than before, thereby improving on its
balance of payments or foreign currency reserves.
27. FORFAITING
Forfaiting, or Medium-Term Capital Goods Financing, means
selling a bill of exchange, at a discount, to a third party, the Forfaiter,
who collects the payment from an, essentially, overseas customer,
through a collateral bank(s), and, thus, assuming the underlying
responsibility of exporters and simultaneously providing trade finance
for importers by converting a short-term loan to a medium term one.
28. FORFAITING…
Done on a non - recourse basis
Used for international trade transactions, usually for transactions not less than
$2,50,000
Tenor of instrument ranges from 180 days to 10 years payments are made
quarterly, semi-annually, annually
Not so Popular as People
are suspicious of its simplicity
coupled with a lack of complex documentation
29. INFORMATION THE FORFAITER NEEDS
who the buyer is and his nationality;
what goods are being sold;
details regarding the value and currency of the contract;
the date and duration of the contract including the credit period
and number and timing of payments (including any interest rate
already agreed with the buyer)
evidence of debt that will be used (either promissory notes, bills
of exchange, letters of credit)
30. DOCUMENTS REQUIRED
BY
FORFAITER FROM EXPORTER
Copy of supply contract, or of its payment terms
Copy of signed commercial invoice
Copy of shipping documents including certificates of receipt,
railway bill, airway will, bill of lading or equivalent documents
Letter of assignment and notification to the guarantor
Letter of guarantee (standby letters of credit may also be used)
31. FORFAITING CHARGES
Forfaiters try to ensure that the buyer, not the seller, incurs
charges involved in a Forfait transaction.
Charges depend on
the level of interest rates relevant to the currency of the
underlying contract at the time of the Forfaiter's commitment
the Forfaiter's assessment of the credit risks related to the
importing country and to the avalizing (or guaranteeing) bank
32. DIFFERENCES
Forfaiting
Export Factoring
The entire value of bill is discounted Discounted value ranges between 75
by forfaiter
– 85 %
Involvement of Availing Bank
Export factor
worthiness
Purely a financing arrangement
Also includes ledger administration,
collection, etc
Exchange rate
guarded against
fluctuations
are Exchange rate
guarded against
assesses
fluctuations
credit
not
