This document provides an overview of various trade finance instruments including bill discounting, factoring, and forfeiting. It discusses key concepts such as with and without recourse, the parties involved in each instrument, benefits, costs, and other important details. Factoring involves the purchase of a company's accounts receivable by a factor in exchange for immediate cash, allowing the company to better manage cash flow. Forfeiting involves the sale of export invoices or bills of exchange to a third party to obtain immediate payment, providing medium-term financing to importers.
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This document provides an overview of various trade finance instruments including bill discounting, factoring, and forfeiting. It discusses key concepts such as with and without recourse, the parties involved in each instrument, benefits, costs, and other important details. Factoring involves the purchase of a company's accounts receivable by a factor in exchange for immediate cash, allowing the company to better manage cash flow. Forfeiting involves the sale of export invoices or bills of exchange to a third party to obtain immediate payment, providing medium-term financing to importers.
This document provides an overview of various trade finance instruments including bill discounting, factoring, and forfeiting. It discusses key concepts such as with and without recourse, the parties involved in each instrument, benefits, costs, and other important details. Factoring involves the purchase of a company's accounts receivable by a factor in exchange for immediate cash, allowing the company to better manage cash flow. Forfeiting involves the sale of export invoices or bills of exchange to a third party to obtain immediate payment, providing medium-term financing to importers.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPTX, PDF, TXT or read online from Scribd
This document provides an overview of various trade finance instruments including bill discounting, factoring, and forfeiting. It discusses key concepts such as with and without recourse, the parties involved in each instrument, benefits, costs, and other important details. Factoring involves the purchase of a company's accounts receivable by a factor in exchange for immediate cash, allowing the company to better manage cash flow. Forfeiting involves the sale of export invoices or bills of exchange to a third party to obtain immediate payment, providing medium-term financing to importers.
Copyright:
Attribution Non-Commercial (BY-NC)
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Download as PPTX, PDF, TXT or read online from Scribd
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Discounting, factoring and forfeiting
fsm
Bill discounting
It should be a usance bill 30-180 days 2 signatures With recourseOr Without recourse-
With recourse
Documentary cr- undertaking by the bank to pay to the seller on request of the buyer Bk checks this dc and sends this to bank requesting for payment to the customer Nominated bk need not check the documents Here nominated bank will claim the fund The nominated bk will send the amount to the bank and pay to the customer
Without recourse
Bker passes the original dc and unchecked documents to the nominated bk on a collection basis, requesting payment Nominated bnk has to check documents in normal way Opening bank present documents to nominated bank without recourse
Factoring
Continuing arrangement Between financial institution and the business concern Selling goods and services to trade customers Whereby the factor purchases the clients a/c receivables with or without recourse to the client Control the cr to the customers and administers the sales ledger
Modus Operandi
Factor operates by buying from the selling company their invoiced debts. Purchased without recourse Cr controller, collection and sales accounting work Mgmt of the co concentrate on production and sales Need not look out on this matter
They obtain money-80% of invoice Without having to wait till the buyer pays Factor charges service charges Seller of good and services make arrangement of the factor
Invoice Notify the factor-copy is sent Funding-80% amt Follow up with the customer Payment received by factor from customer Balance payment made immediately once amt is received He sends monthly stmt
Parties
Buyer of goods Seller of goods factor
Characteristics
Factoring is a money mkt instrument book debts Not a negotiable instrument- customers consent is reqd service charges Credit insurance facility available to the client Margin 5-20%
Benefits of factoring To the seller: Liquidity Ledger mgmt Add on benefits Statements
To the customer of seller
Adequate cr period No documentation Co can strengthen its links
disadvantage
Image- factor is not a good sign Not suitable for one time sales Higher cost
Terms and condition
Basic offer statement Acceptance Non recourse condition Power of attorney Agreement to dosclose factoring Non collection of dues by the firm Cr to customers- commission , warranties etc
Types of factoring Non- recourse factoring- offers all types of services with debt protection Finance, sales ledger, debt, protection, advisory Recourse factoring-all types of facilities accept for debt protection Invoice factoring- only finance no other service Maturing factoring- no finance other services are provided
Undisclosed- does not collect paymt from customer. Customer doesnot know abt factoring arrangement and makes paymt to client. client pays to factor
Domestic-ask students International factoring- ask students Guarantee based factoring-due date importer pays to exporter for the invoice for which factor gives guarantee
With recourse
Without recourse
concept
risk
If client doesnt pay It becomes bad debt factor recovers it from seller Shared by client and Factor factor
cost
Less expensive fee of the factor
Commonly used
Very expensive
use
Less common
exampele
Mftg business
Transportation industry
exclusions
No financing by the bank
Professional fees are not factorable- advance paymt,part paymt cannot be controlled Sale of capital goods
Factoring in India
Hampered because of regulations No law or legislation No protection to factors under debt recover tribunal. Indias factoring business 9950 cr in 2005 Citibank Export cr guarantee corporation of India ltd Sbi Honkong shanghai bkin corp ltd
Benefits of international factoring
Competitive terms of sale Protection against cr losses on foreign customers Lower cost on transactions Liquidity Borrowing increases more Eases cr burden Pay commission rest is looked by factor
Signs a factoring contract.
Gives recievabl e to export factor
He select import factor of the importer s country
exporter Exporters factor Once goods are dispathched xporte is paid 80% amount.
He is given invoice and told to check cr worthiness of importer
importer It will help importer to place on order by not issuing L/C
Importers factor
Factors chain international
Facilitate international trade thru factoring and related financial services It helps its members to get international trade financial services thru globall network of first class factoring companies 1968
Forfeiting
Exporter relinguishing his right For getting immediate payment Because he is paid after sme time Selling a bills of xchange- at disount- to a third partywho collects payment from-importer-thru a banksimultaneously provide- mediium term loan to importers
Here forfeitor will either claim the money from importer or he will sell the same invoice to another investor on a nonrecourse terms Matching with bill discounting concept
features
International trade transactions Not less than 100000 $ transactions handled Fixed rate medium term finance Some FS takes invoice for 10 yrs and shorter period is 180 days Payment made semiannually basis Risk element eliminated
Benefits
Fixed rate finance No recourse Liquidity Debt admin Currency and int rate risk Forfeiting cost can be charged to the importer
drawbacks
Carefull documentation for availing non recourse Importers guarantor Higher cost
Information needed by forfeitor
Buyer and his nationality Details of goos or projects Detail of Value and currency of contract Date and duration Installment or not Evidence of debt that will be used
Documents required by a forfeitor
Copy of supply contract Copy of signed invoice shipping documents Letter of guarantee Letter of assignment
Cost of forfeiting
Interest Charge of covering country risk Foreign xchange risk Additional cost If necessary libor rate
In India
Rbi approved in 92 Exim bank and authorised dealers permitted in the year 97 To act as an intermediator between exporter and forfeiting agency Terms and condition
Conditions by RBI
Min amt not less than 100000$ Low cr period 180 days Cost related issues- negotiations Exports to ltd countries 50% got to 10 countries and 70% 15 countries
