FACTORING

DEFINATION
FACTORING MEANS AN ARRAGEMENT BETWEEN A FACTOR AND
HIS CLIENT WHICH INCLUDES AT LEAST TWO OF THE FOLLOWING
SERVICES TO BE PROVIDED BY THE FACTOR
► FINANCE
► MAINTENANCE OF THE ACCOUNTS
► COLLECTION OF THE DEBTS
► PROTECTION AGAINST CREDIT RISK
 TYPES OF FACTORING
RECOURSE
HERE THE FACTOR HASRECOURSE TO THE CLIENT IF THE DEBT
PURCHASED/RECEIVABLES FACTORED TURNS OUT TO BE
IRRECOVERABLE.IF THE CUSTOMER DEFAULTSIN PAYMENT,
THE CLIENT HAS TOMAKE GOOD THE LOSS INCURRED BY THE
FACTOR.

NON-RECOURSE
HERE THE FACTOR DOES NOT HAVE THE RIGHT OF
RECOURSE.THE LOSS ARISING OUT OF IRRECOVERABLES
RECEIVABLES IS BORNE BY HIM, AS A COMPENSATION FOR
WHICH HE CHARGES A HIGHER COMMISSION AND THIS
COMMISSION IS CALLED DEL-CREDERE COMMISSION
 TYPES OF FACTORING
ADVANCE FACTORING
HERE THE FACTOR PAYS A PRE-SPECIFIED PORTION, RANGING
BETWEEN 3/4TH TO 9/10TH, OF THE FACTORED RECEIVABLES IN
ADVANCE, THE BALANCE BEING PAID UPON COLLECTION ON THE
GUARANTEED PAYMENT DATE. THE CLIENT HAS TO PAY INTEREST
ON THE ADVANCE/REPAYMENT BETWEEN THE DATE OF SUCH
PAYMENT AND THE DATE OF ACTUAL COLLECTION FROM THE
CUSTOMER.

MATURITY FACTORING
HERE HE FACTOR DOES NOT MAKE A PRE-PAYMENT TO THE
CLIENT. THE PAYMENT IS MADE EITHER ON THE GUARANTEED
PAYMENT DATE OR ON THE DATE OF COLLECTION
 TYPES OF FACTORING
FULL FACTORING
THIS IS THE MOST COMPREHENSIVE WAY OF FACTORING
COMBINING THE FEATURES OF ALMOST ALL THE FACTORING
SERVICESSPECIALLY THOSE OF NON-RECOURSE AND ADVANCE
FACTORING.IT PROVIDES ALL THE SERVICES NAMELY,
COLLECTION, CREDIT, PROTECTION, SALES LEDGER
ADMINISTRATION AND SHORT TERM FINANCE.

DISCLOSED FACTORING
HERE THE NAME OF THE FACTOR IS DISCLOSED IN THE INVOICE BY
THE SUPPLIER-MANUFACTURER OF THE GOODS ASKING THE
BUYER TO MAKE PAYMENT TO THE FACTOR.THE SUPPLIER MAY
CONTINUE TO BEAR THE RISK OF NON-PAYMENT BY THE BUYER
WITHOUT PASSING IT ON TO THE FACTOR.THE FACTOR ASSUMES
THE RISK UNDER NON-RECOURSE ARRANGEMENT.
 TYPES OF FACTORING
UNDISCLOSED FACTORING
THE NAME OF THE FACTOR IS NOT DISCLOSED IN THE
INVOICE.THE FACTOR MAINTENCE THE SALES LEDGER OF
THE SUPPLIER-MANUFACTURER. THE ENTIRE REALISATION
OF THE BUSINESS TRANSACTIONIS DONE IN THE NAME OF
THE SUPPLIER COMPANY BUT ALL CONTROL REMAINS WITH
THE FACTOR. HE ALSO PROVIDES SHORT TERM FINANCE
AGAINST SALES INVOICE

DOMESTIC FACTORING
THERE ARE 3 PARTIES INVOLVED, NAMELY,
CUSTOMER(BUYER),CLIENT(SELLER), AND
FACTOR(FINANCIAL INTERMEDIARY) ARE DOMICILED IN THE
SAME COUNTRY.
 TYPES OF FACTORING
EXPORT/CROSS-BORDER/INTERNATIONAL FACTORING

HERE THERE ARE 4 PARTIES INVOLVED EXPORTER(CLIENT)

IMPORTER(CUSTOMER), EXPORT FACTOR AND IMPORT FACTOR.
IT RESULTS IN 2 SEPARATE BUT INTER LINKED AGREEMENTS
BETWEEN THE EXPPORTER AND THE EXPOR FACTOR AND
BETWEEN THE EXPORT FACTOR AND THE IMPORT FACTOR. THE
IMPORT FACTOR PROVIDES A LINK BETWEEN THE EXPORT
FACTOR AND IMPORTER AND SERVES TO SOLVE THE
INTERNATIONALBARRIERS LIKE LANGUAGE PROBLEM, LEGAL
FORMALITIES ETC.. HE ALSO UNDEWRITES CUSTOMER TRADE
CREDIT RISK,COLLECTS RECEIVABLES AND TRANSFER FUNDS
TO THE EXPORT FACTOR IN THE CURRENCY OF THE INVOICE
 VENTURE CAPITAL
• Definition of venture capital : IT IS AN EQUITY/EQUITY RELATED
INVESMENT IN A GROWITH ORIENTED SMALL/MEDIUM BUSINESS TO
UNABLE INVESTEES TO ACCOMPLISH CORPORATE OBJECTIVES, IN
RETURN FOR MANORITY SHARE HOLDING IN THE BUSINESS OR THE
IRREVOCABLE RIGHT TO ACQUIRE IT.
STAGES IN VENTURE CAPITAL
A. EARLY STAGE FINANCING
1. SEED CAPITAL/PRE-START-UP.
2. START UP.
3. SECOND REOUND FINANCING.
B. LATER STAGE FINANCING
1 DEVELOPMENT CAPITAL
2 BRIDGE/EXPANSION
3.BUY OUTS.
4.TURNARAOUNDS
 STAGES IN VENTURE CAPTIAL
• SEED CAPITAL
THIS STAGE IS ESSENTIALLY AN ‘APPLIED RESEARCH’PHASE WHERE
THE CONCEPT AND IDEAS OF THE PROMOTERS CONSTITUTED THE
BASES OF THE PRE COMMERICALISATION RESEARCH PROJECT
USUALLY EXPECTED TO END IN A PROTOTYPE WHICH MAY OR MAY
NOT LEAD TO BUSINESS LAUNCH. THIS PHARSE GRADUALLY
MOVES TOWARDS THE DEVELOPMENT PHARSE LEADING TO A
PROTOTYPE PRODUCT TESTING AND THEN TO
COMMERCIALISATION.
 START UP
THIS IS THE STAGE WHEN COMMERICAL MANUFACRING HAS TO
COMMENCE. VENTURE CAPTITAL FINANCING HERE IS PROVIDED
FOR PRODUCT DEVELOPMENT AND INITIAL MARKETING. THE
ESSENCE OF THIS STAGE IS THAT THE PRODUCT/SERVICE IS BEING
COMMERCILISED FOR THE FIRST TIME. IT INCULDES SEVERAL TYPE
OF NEW PROJECT.
SECOND ROUND FINANCING
THIS REPRESENT A STAGE AT WHICH THE PRODUCT HAS ALREADY
LAUNCHED IN THE MARKET BUT THE BUSINESS HAS NOT, YET,
BECOME PROFITABLE ENOUGH OF PUBLIC OFFERING TO ATTRACT
NEW INVESTOR. THE PORMOTER HAD INVESTED HIS OWN FUNDS
BUT FURTHER INFUSTION OF FUNDS BY THE VCIs IS NECESSARY.
THE TIMES SCALE FOR THE INVESTMENT IS SHOTER THEN IN THE
CASE OF START UP. THE VCI PROVIDE LARGER FUNDS AT THIS
STAGE THEN AT OTHER EARLY STAGE FINACING.
LATER STAGE FINANCING.

THIS STAGE OF VENTURE CAPITAL FINANCING

INVOLVES ESTABLISED BUSINESS WHICH REQURIE
ADDITIONAL FINANCIAL SUPPORT.
 DEVELOPMENT CAPITAL
THIS IS FINANCING OF ESTABLISHED BUSINESS WHICH HAVE
OVERCOME HIGH RISK EARLY STAGE, HAVE RECORDED PROFITS
FOR FEW YEARS BUT ARE YET TO REACH A STAGE WHEN THEY
CAN GO PUBLIC AND RAISE MONEY FROM THE CAPITAL MARKET
 BRIDGE/EXPANSION

THIS FINANCE BY VCI INVOLVES LOW RISK PERCEPTION AND TIME

FRAME OF ONE TO THREE YEARS. VENTURE CAPITIAL
UNDERTAKINGS USE SUCH FINANCE TO EXPAND BUSINESS BY WAY
OF GROWTH OF THEIR OWN PRODUCTIVE ASSET OR BY THE
ACQUISTION OF OTHER FIRMS/ASSETS.
 BUYOUTS
THESE REFER TO THE TRANSFER OF MANGEMENT CONTROL. THEY
FALL INTO TWO CATEGORISES.
A. MANAGEMENT BUYOUTS.
B. MANAGEMENT BUYINS.
 MANAGEMENT BUYOUTS
IN MBO’S,VCI’ PROVIDE FUNDS TO ENABLE THE CURRENT OPERATING
MANAGEMENT/INVESTORS TO ACUIRE AN EXISITNG PRODUCT
LINE/BUSINESS.
 MANAGEMENT BUYINS
MBIS ARE FUNDS PROVIDED TO ENABLE OAN OUTSIDE GROUP TO BUY
AN ONGOING COMPANY. THEY USUALLY BRING THREEE ELEMENTS
TOGETHER: A MANGEMENT TEAM A TARGET COMPANY AND AN
INVESTOR MBIS ARE LESS POPULAR THAN MBOS. ANMBI IS MORE
RISKY BEACAUSE THE MANAGEMENT COMES FROM OUTSIDE AND
FINDS IT DIFFICULT TO ASSESS THE ACUTAL POTENTIAL OF THE
TARGET COMPANY.
 TURN AROUNDS
THESE ARE A SUB-SET OF BUYOUTS AND INVOLVE BUYING THE
CONTROL OF SICK COMPANY. TWO KINDS OF INPUTS ARE
REQUIRED IN A TURNAROUD. NAMELY MONEY AND MANAGEMENT.
THE VCIS HAVE TO IDENTIFY GOOD MANAGEMENT AND OPERATION
LEADERSHIP. SUCH FROM OF VENTURE CAPITAL FINANCING
INVOLVES MEDIUM TO HIGH RISK AND A TIME FRAME OF THEREE
TO FIVE YEARS.
 CONCLUSION
TO CONLCUDE, VENTURE CAPITAL FIMS FINANCE BOTH EARLY AND
LATER STAGE INVESTMENTS TO MAINTAIN A TRADE OFF BETWEEN
RISK AND PROFITABLITY. IN EARLY STAGE INVESTMEN T,
PARTICLARLY STARUPS IN THE HIGH TECHONOLGY INDUSTRIES
THE TECHNOLOGY IS OFTEN UNTRIE AT A COMMERCIAL LEVEL OF
OPERATION, MARKET IS UNDEVELOPED AND POTENTIL
COMPETITION IS UNKNOWN AS THE PRODUCT ITSELF IS NEW.