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    Factoring 1

    Uploaded by

    Sudhir Gijare
    The document discusses factoring and forfaiting facilities in India. It provides details on: 1) Factoring involves the purchase of accounts receivables from clients by factors, who then take on responsibility for credit risk, collections, and account maintenance. 2) Forfaiting is a specific type of export trade financing where export receivables evidenced by bills/notes are discounted without recourse by financial institutions called forfaiters. 3) The key difference is that forfaiting provides 100% financing and transfers all risks to the forfaiter, while factoring typically provides 75-80% financing and may involve some credit risk retention by the client.

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    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    Factoring 1

    Uploaded by

    Sudhir Gijare
    53 views21 pages
    The document discusses factoring and forfaiting facilities in India. It provides details on: 1) Factoring involves the purchase of accounts receivables from clients by factors, who then take on responsibility for credit risk, collections, and account maintenance. 2) Forfaiting is a specific type of export trade financing where export receivables evidenced by bills/notes are discounted without recourse by financial institutions called forfaiters. 3) The key difference is that forfaiting provides 100% financing and transfers all risks to the forfaiter, while factoring typically provides 75-80% financing and may involve some credit risk retention by the client.

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    FACTORING 1

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    The document discusses factoring and forfaiting facilities in India. It provides details on: 1) Factoring involves the purchase of accounts receivables from clients by factors, who then take on responsibility for credit risk, collections, and account maintenance. 2) Forfaiting is a specific type of export trade financing where export receivables evidenced by bills/notes are discounted without recourse by financial institutions called forfaiters. 3) The key difference is that forfaiting provides 100% financing and transfers all risks to the forfaiter, while factoring typically provides 75-80% financing and may involve some credit risk retention by the client.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    53 views21 pages

    Factoring 1

    Uploaded by

    Sudhir Gijare
    The document discusses factoring and forfaiting facilities in India. It provides details on: 1) Factoring involves the purchase of accounts receivables from clients by factors, who then take on responsibility for credit risk, collections, and account maintenance. 2) Forfaiting is a specific type of export trade financing where export receivables evidenced by bills/notes are discounted without recourse by financial institutions called forfaiters. 3) The key difference is that forfaiting provides 100% financing and transfers all risks to the forfaiter, while factoring typically provides 75-80% financing and may involve some credit risk retention by the client.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 21

    Factoring Facility

    Pursuant to recommendations of Kalyan Sundaram


    Committee in 1989, RBI issued guidelines for factoring
    services in India

    At present NBFCs like SBI Global Factors Ltd, Can Bank
    Factors, HSBC Factors & Citi Bank Factors are in
    factoring activities
    Factoring Services - Concept
    “Factoring means an arrangement between a
    factor and his client which includes at least two of
    the following services to be provided by the factor;
     (i) finance,
    (ii) maintenance of accounts,
    (iii) collection of debts and
    (iv) protection against credit risk
    Factoring Services - Concept Delivery of goods

    Client(Seller) Customer(Buyer)
    Order placed

    Client submits invoice

    Customer pays
    Factor-Prepayment

    Monthly statements

    Factor
    Factoring Services - Concept
    Factor offers financing solutions which goes beyond
    banking

    Factoring is a financial service covering the financing and


    collection of accounts receivables in domestic as well as in
    international trade

    Basically, factoring is an arrangement in which receivables


    on account of sale of goods or services are sold to the
    factor at a certain discount. As the factor gets the title to
    the receivables on account of the factoring contract, factor
    becomes responsible for all credit control, sales ledger
    administration and debt collection from the customers
    Benefits of Factoring
    All the sales practically become cash sales to the
    seller 
     Money blocked with sundry debtors becomes
    available for business. 
     The seller also gets rid of collection of the
    receivables 
     The (Client)SME unit which is one man show(small
    set up), his working capital management becomes
    efficient. It also reduces his cost and in turn improve
    the possibility of better profits
    Characteristics of factoring
    Usually period for factoring is 90 to 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). Hence these companies can
    leverage on the financial strength of their
    customers.
    Charateristics of factoring
    Credit rating is not mandatory. But the factoring
    companies usually carry out credit risk analysis before
    entering into the agreement.
    Factoring is a method of off balance sheet financing.
    Cost of factoring=finance cost + operating cost.
    Factoring cost vary according to the transaction size,
    financial strength of the customer etc. The cost of
    factoring vary from 1.5% to 2% per month depending
    upon the financial strength of the client's customer.
    Factoring Services - Concept
    Parties to factoring – client, customer and factor

    Cost of factoring
    Service fee (for administrating the sales ledger – as a
    percentage of invoice value or number of invoices)
    Finance charges (advance provided by factor and is
    interest which is PLR plus or minus)
    Initial Processing charges for sanction of the facility
    How the factoring facility is sanctioned
    An Application along with recent financial statements
    Details of customers (against whom factoring facility
    is to be considered) need to be furnished
    Visit by factoring Representative for detail dialouge
    Centralised processing/appraisal and sanction of
    facility customerwise(disclosed & Undisclosed limits)
    L O N from customer and L O D from the Banker
    Sanctioning & day today Operations are centralised
    through Relationship Managers
    Factor being Small set up- decision making fast/cost
    comparatively low
    Types of Factoring Services
    Recourse and without-recourse Factoring
    With recourse to client / Credit protection. Worldwide
    non-recourse factoring is followed
    Advance and Maturity Factoring
    Advance paid against invoice where as in maturity
    factoring payment is made against guarantee or
    collection of receivables
    Disclosed and Undisclosed Factoring
    Name of the factor is disclosed in the invoice by the
    supplier/client asking the customer to make payment
    to the factor
    Why factoring is at slow space
    Absence of regulatory frame work. There is no
    factoring Act in India. Stamp duty on assignment of
    invoices factored
    Quality of clients/customer
    A few Corporates and PSUs are not keen to subject
    themselves to the strict commitment to honour
    financial obligations on the agreed date.
    Factors - not covered by the Debts Recovery Tribunal
    Act 
    Competition from Banks. High Cost of factoring
    THANK
    YOU
    Factoring Vs Bills Discounting
     Bill discounting is always with recourse, factoring can be either with
    or without recourse
     In B.D.drawee undertakes the responsibility of collecting the bills
    and remitting the proceeds to financing agency, whereas a factor
    usually undertakes to collect the bills of the client
     B. D. facility implies only provision of finance but a factor also
    provides other services like sales ledger maintenance and advisory
    services
     Discounted bills may be rediscounted several times before they
    mature for payment. Debts purchased for factoring cannot be
    rediscounted, they can be refinanced
     Factoring implies the provision of bulk finance against several
    unpaid trade generated invoices in batches, bill financing is
    individual transaction-oriented – each bill is separately assessed
    and discounted
     Factoring is an off-balance mode of financing

     B. D.does not involve assignment of debts as is the case with


    factoring
    Export/Import of Factoring
    Concept
    There are usually four parties to a cross-border
    factoring transactions
    Exporter (client)
    Importer (customer)
    Export Factor
    Import Factor
    Two factor system results in two separate but
    inter-linked agreements
    Between exporter and export factor
    Between export factor and import factor
    Forfaiting
    Forfaiting is a form of financing of (export)
    receivables pertaining to international trade. It
    denotes the purchase of trade bills/promissory
    notes by a bank/financial institution without
    recourse to the seller. The purchase is in the form
    of discounting the documents covering the entire
    risk of non-payment in collection. All risks and
    collection problems are fully the responsibility of
    the purchaser (Forfaiter) who pays cash to seller
    after discounting the bills/notes.
    Forfaiting, In short
     Specific form of export trade finance
     Export receivables discounted – full value of export bill considered
     Debt instruments most commonly used are bills of exchange and
    promissory notes
     Payment in respect of export receivables which is further
    evidenced by bills of exchange/promissory notes must be
    guaranteed by importers bank. Usual form of guarantee is an Aval
     Forefaiting is always without recourse
     Source of trade finance which enables exporters to get funds from
    the institution called forfaiter on transferring the right to recover
    the debts from the importer
    Factoring Vs Forfaiting
    Forfaiter discounts the entire value – 100 % finance where
    as a Factor – 75-80%
    Avalling bank provides unconditional and irrevocable
    guarantee – critical factor in forfaiting – in factoring
    decision is based on credit rating of the exporter (non-
    recourse)
    Forfaiting is pure financial arrangement – Factoring
    includes ledger administration, collection, advise etc
    Factoring is short-term finance whereas forfaiting finances
    notes/bills arising out of deferred credit transactions spread
    over 3 years
    A factor does not guard against exchange rate fluctuations,
    whereas forfaiter charges a premium for such risk
    THANK
    YOU
    Forfaiting
    Forfaiting is a form of financing of (export)
    receivables pertaining to international trade. It
    denotes the purchase of trade bills/promissory
    notes by a bank/financial institution without
    recourse to the seller. The purchase is in the form
    of discounting the documents covering the entire
    risk of non-payment in collection. All risks and
    collection problems are fully the responsibility of
    the purchaser (Forfaiter) who pays cash to seller
    after discounting the bills/notes.
    Forfaiting
     Exporter enters into a fortaiting arrangement with a forfaiter which
    is usually a reputed bank including exporter’s bank. Exporter sells
    the availed notes/bills to the bank (forfaiter) at a discount without
    recourse. The agreement provides for the basic terms of the
    arrangement such as cost of forfaiting, margin to cover risk,
    commitment charges, days of grace, fee to compensate the forfaiter
    for loss of interest due to transfer and payment delays, period of
    forfaiting contract, installment of repayment, usually bi-annual
    instalment, rate of interest and so on. The rate of interest or
    discount charged by the forfaiter depends upon the terms of the
    note/bill, the currency in which it is determined, credit rating of the
    avalling bank, country risk of the importer etc
     Payment to forfaiter to the exporter of the face value of the bill/note
    less discount
     Forfaiter may hold these notes/bills till maturity for payment by the
    importer’s bank. Alternatively, he can securitize them and sell the
    short-term paper in the secondary market as high-yielding
    unsecured paper
    Forfaiting arrangements
     The exporter sells the goods to the importer on a deferred payment basis spread
    over 3-5 years.
     The importer draws a series of promissory notes in favor of the exporter for the
    payments to be made inclusive of interest charges.
     The promissory notes are avalled or guaranteed by a reputed international bank
    which can also be the importer’s banker. (An aval is an endorsement on the
    promissory notes by the guaranteeing bank that it covers any default of payment
    by the buyer).
     The exporter sells the avalled notes to a forfaiter (which can be exporter’s banker)
    at a discount and without recourse. The discount rate applied by the forfaiter will
    depend upon the terms of the promissory notes, the currencies in which they are
    denominated, the credit rating of the avalling bank, the country risk of the
    importer, and the prevailing market rate of interest on medium-term loans.
     The forfaiter may hold these notes till maturity or sell these notes to groups of
    investors interested in taking up such high-yielding unsecured paper.

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