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Kultur Dokumente
THE
GUIDANCE OF
Dr. FATEH BAHADUR SINGH SIR
Dr. F. B. SINGH
DIPANVITA YADAV
PROFESSOR
ROLL NO. 18
COMMERCE FACULTY
COMMERCE FACULTY
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CERTIFICATE
This is to certify that Ms. DipanvitaYadav, the student of Master of
Financial Management- 4th Semester; Roll No. 18,has successfully
completed her dissertation report on the topic Factoringunder my
supervision and guidance for the session 2013-2015.
During this period, she has been found sincere and dedicated
towards her work. I wish her for prosperous success and bright future.
Dr.F.B.Singh
Professor
Faculty of Commerce
Banaras Hindu University
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ACKNOWLEDGEMENT
In the preparation of this dissertation report, I have received encouragement and support from
my mentor Dr.F.B.Singh, Professor, Faculty of Commerce, Banaras Hindu University,
Varanasi. I would like to express my gratitude towards him for providing his valuable support
and guidance.
Secondly, I would like to give thanks to those honourable personalities who have included
this dissertation work as a part of our course so that we can able to find out some new area to
enhance our knowledge. While working on this report, I am very much appraised by my
mentor to research on my topic Factoring. Due to him, I found the worth of my topic that
its a very new and different topic of research.
Thirdly, I would like to thank my facultys Dean Dr.A.R.Tripathi for providing us this
wonderful course and due tothe support of him and the support of Faculty of Commerce, I
am able to present my views and experience in the form of dissertation.
Fourthly, I would like to thank the authors of some books which have helped me in the
completion of my project report.
Last but not the least, I would like to thank my parents for praising and supporting me at
every stage of my life to do something better and different.
I would like to thank again the mentor by saying,Thank you sir for being the mentor of
my dissertation.....
DipanvitaYadav
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CONTENTS
1. INTRODUCTION........................................................................................... 05
2. HISTORY OF FACTORING........................................................................... 06
3. CONCEPT AND MEANING OF FACTORING................................................. 07
4. PROCESS OF FACTORING........................................................................... 08
5. PARTICIPANTS OF FACTORING................................................................. 10
6. FUNCTIONS OF FACTORING........................................................................ 12
7. TYPES OF FACTORING............................................................................... 14
8. COST AND BENEFITS OF FACTORING........................................................ 16
9. ADVANTAGES AND DISADVANTAGES OF FACTORING........................... 18
10. SBI GLOBAL FACTORS LTD........................................................................ 19
11. Factoring in india and role of reserve bank............................... 21
12. Growth of factoring industry in India............................................ 27
13. Conclusion................................................................................................. 29
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INTRODUCTION
Many financial institutions which are providing factoring services to large corporate entities,
decided to focus on small and medium enterprises due to their large contribution to the
economy as factoring help small businesses to achieve faster growth by efficient management
of their working capital.
Financing receivables with the help of factoring can help a company having liquidity without
creating a net liability on its financial condition. Although in the western countries, factoring
industry handles billions of dollars business every year, but business houses in India are still
unsure about using it as a financial tool. At the instance of RBI, a committee headed by
ShriC.S.Kalyanasundaram went into the aspects of factoring services in India. In 1991, SBI
established its subsidiary- SBI Factors Ltd.with an authorised capital of Rs. 25 Crores to
undertake factoring services.
Regular flow of working capital is needed for the smooth functioning of any enterprises.
Purchases of goods and services often delay their payments, resulting in working capital.
However, expediting the collection of accounts receivables could alleviate the difficulties of
the suppliers of goods and services. Therefore, factoring is a financial service designed to
help the companies to arrange the payment of their receivables in a better manner. Factoring
is extensively used in developed countries.
Factoring grew specifically out of the need for working capital in some industries. Most of
the new firms fail due to poor cash flow management. Cash flow needs are not restricted to
start up operations only. Many established and even prosperous businesses occasionally face
a cash crunch. One solution that is rapidly growing in popularity is Factoring. Factoring
provides the means for businesses to convert receivables to cash before they are due without
retaining liability for their payment. In its inception, factors acted as commission merchants
handling goods on consignment. During the latter years of 19th century and the early years of
the present century, factors began to stop acting as sales agent for their clients. The general
factors thus gradually evolved into modern factor. The growth of factoring, the entry of
variety of financial institutions into this field, and the widespread uses of such financing in
many different lines of business are all recent phenomena, developing since the beginning of
the present century.
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HISTORY OF FACTORING
Factoring the purchase of organisations book debts by third party has its root in ancient
history.
THE ANCIENT HISTORY OF FACTORING
Prior to the 20th century a factor was a business agent included warehousing and selling of the
commodities consigned to the agent, accounting to the principals for the proceeds and
guaranteeing the credit of purchasers. Sometimes cash advances were also made to the
principals before the actual sale of goods.
According to Wood the first record of such middleman functions was about 5000 years in
ancient Iran where guarantees were issued to sellers of goods as security to assure the
fulfilment of buyers obligations. These agents sold goods in their own name on the behalf of
a principal, issued invoices, extended credit, with and without recourse to the principal and
provided other trade services.
The ancient Sumarians also provided such middleman functions as did the Assyrians who
extended the service to act as commission merchants and finance for trade caravans. The
Babylonians later introduced the concept of notification to pay specific third parties.
Whereas previously merchants borrowed cash and paid promptly for the goods, in ancient
Greece Protagoras promoted the true credit purchase pay by sundown.
During the 16th century factoring became an important means of stimulating international
trade between newly settled colonies and the respective mother countries.
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PROCESS OF FACTORING
The main function of the factoring is the realization of credit sales. Once the sales transaction
completed between the firm and the buyer, the factor starts realizing the sale proceeds. The
seller enters into an agreement with a factor whereby the factor provides the facility of debt
collection. Sometimes the sellers bank is also involved in the factoring business. The seller
hands over the duly signed copy of invoice to the factor. Generally 80 per cent of the invoice
value is paid against the realization. The factor collects the service charges and discount
charge (comparable to bank interest rate) from the seller/client. The factor furnishes
periodical statement to both, the seller and the customer. The maximum debt period permitted
under factoring is 150 days inclusive of a maximum grace period of 60 days.
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A factor provides finance to his client up to a certain percentage of the unpaid invoices which
represent the sale of goods or services to approved customers. The modus operandi of the
factoring scheme is as follows:
i.
ii.
iii.
iv.
v.
vi.
ii.
iii.
Conditions within which the factor will have recourse to the client in case of nonpayment by the trade customer,
iv.
Circumstances under which the factor will have recourse in case of non-payment,
v.
Details regarding the payment to the factor for his services, say for instance, as a
certain percentage on turnover,
vi.
Interest to be allowed to the factor on the account where credit has been sanctioned to
the supplier, and
vii.
Limit of any overdraft facility and the rate of interest to be charged by the factor.
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PARTICIPANTS OF FACTORING
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A client sends the business name, address and amount he wants to factor for a particular
business client. Credit is verified and limits are established for the business client. There is no
charge for credit validation. The seller and the factor enter into an agreement of availing the
factoring service. The factor after reviewing the invoice and other documents makes payment
to the seller. The factor receives payment from the buyer on the due dates and gives the
remaining amount due to the seller after deducting his service charges.
Certain documents are essential for availing the factoring service. These are:
The invoice, bills or other documents by the seller with a mention of factoring service.
A written statement by the seller to ensure that the bills are free from any
encumbrances, charges, lien, pledge, hypothecation, etc.
Deed of assignment to enable the factor to recover the money from the seller, if there
is any default.
A letter of confirmation stating that all the conditions of the sell-buy contract between
the buyer and the seller have been complied with and the transaction is complete,
should be issued by the seller.
A letter of waiver in favour of the factor is needed, if the banks have any charge over
the assets sold. The seller should arrange for the letter of waiver.
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FUNCTIONS OF FACTORING
As stated earlier the term factoring simply refers to the process of selling the trade debts of
a company to a financial institution working as a factor. But, in practice, it is more than that.
Factoring involves following functions:
Factoring envisages the sale of trade debts to the factor by the company, i.e. the client. It is
where factoring differs from discounting. Under discounting, the financier simply discounts
the debts backed by the account receivables of the client. He does so as an agent of the client.
But, under factoring, the factor purchases entire trade debts and thus, he becomes the holder
for value and not an agent; once the debts are purchased by the factor, collection of debts
becomes his duty automatically.
Sales ledger management is a very important function of the factoring. Once the factoring
relationship is established, it becomes the factors responsibility to take care of all the
functions relating to the maintenance of sales ledger. The factor has to credit the customers
account whenever payment is received, send monthly statements to the customers and to
maintain the liaison with the client and the customer to resolve all the disputes. He has to
inform the client about the balances in the account, the overdue period, the financial standing
of the customers, etc. Thus, the factor takes up the work of monthly sales analysis, overdue
invoice analysis and credit analysis.
The factor has to monitor the financial position of the customer carefully, since he assumes
the risk of default in payment by customers due to their financial inability to pay. This
assumption of credit risk is one of the most important functions which the factor accepts.
Hence, before accepting the risk, he must be fully aware of the financial viability of the
customer, his past financial performance record, his future ability, his honesty, and integrity
in the business world, etc. For this purpose, the factor also undertakes the credit investigation
work.
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4. PROVISION OF FINANCE
After the finalization of an agreement and sale of goods by the client, the factor provides 80
per cent of the credit sales as prepayment to the client. Hence, the client can go ahead with
his business plans or production schedule without any interruption. This payment is generally
made without any recourse to the client. That is, in the event of non- payment, the factor has
to bear the loss of payment.
Apart from the above, the factor also provides the management services to the client. He
informs the client about:
The changing business and financial profiles of the customers of the client,
Audits the procedures for invoicing, delivery and dealings with sales return.
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TYPES OF FACTORING
The factoring services differ from each other depending on the agreement entered into and
the services provided. The basic service of the factor, i.e. collection of receivables and sales
ledger administration is common in all factoring services. The types of factoring are
discussed as below:
1) NON- RECOURSE FACTORING
The factor purchases accounts receivable without recourse to the client, and bears the entire
burden of collection and risk of bad debts losses. This feature is especially attractive to a
company which cannot afford extraordinary bad- debt losses.
Along with buying clients accounts receivable without recourse, factors offer a number of
other services. Primarily, among these is the lending of money against inventory. This
method of secured borrowing is often used by customers to finance temporary needs for
working funds. When the client sells inventory, it turns over the resultant receivables to the
factor and liquidates the loan.
2) RECOURSE FACTORING
The factor purchases the account receivables with recourse to the client. A client may have
made an independent decision to supply merchandise in excess of the limit the factor is
responsible for. The factor will work the receivable until a specific date (usually a set of
number of days) then turn the receivable, which could not be collected, back to the client for
resolution. There can be many creative arrangements that can be made on the basic rules for
selling with recourse.
3) NOTIFICATION FACTORING
This means that the factoring arrangement is disclosed to customers. They are advised of the
sale of the receivables and are asked to pay the factor direct. While it is a normal practice that
notification is provided in non- recourse factoring it may also occur when the factoring is
with recourse. Notification is usually required when the factors consider the client to be of
higher risk, or when for one reason or another, the probability of non- collection is greater if
the arrangement is hidden.
4) NON- NOTIFICATION FACTORING
The customer is unaware of the factoring arrangement. Payment is usually either forwarded
to the seller, as would normally be the case, or addressed to the seller but sent to the postal
address the control of the factor. Clients acceptable under this arrangement must be of lower
risk class and the accounts receivable would be of a better quality than under notification
factoring. Also, under this arrangement, the client usually remains responsible of the
collection of debts.
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5) MATURITY FACTORING
The factor pays the client on the date the invoices, or the batch of invoices, becomes due for
payment (matures). This form of factoring is suitable without a liquidity improvement need
but one that desires the non- financial services of the factor. These non- financial services
may include:
6) INTERNATIONAL FACTORING
All of the services associated with the factoring, that is, credit assessment, credit
management, and collections, risk guarantees, and financing are also available to exporters
through an export factoring facility. The basic difference between it and domestic factoring is
that international factoring requires both an Export Factor and Import Factor. The Export
factor is located in the home country of the exporter, is responsible for all contacts with the
exporter, providing credit approval information, advancing funds, managing exporters
international sales ledger, remitting any funds to the exporter etc. In fact, the Export factor is
almost in a similar position to the factor in a domestic factoring situation.
Import factors, on the other hand, are responsible for credit checking, collecting funds from
the importers, and remitting funds to the Export factors, and through them their clients,
information about the market conditions in their home markets.
7) AGENCY FACTORING
The word agency has no meaning as far as factoring is considered. Under this type, the factor
and the client share the work between themselves as follows:
The client has to look after the sales ledger administration and collection work, and
The factor has to provide finance and assume the credit risk.
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The cost structures of factoring companies vary across geographies. However, the usual
heads of costs include an interest charge for the funded amount and service fees on
transactions. Additional add-on services availed of like credit protection and collection etc.
could be charged separately depending on the package structured with the client company.
While factoring arrangements may end up being priced slightly higher for the incremental
risks involved, it would be fair to assume that the variation (compared to traditional sources)
would be fairly small.
Factor usually charge for their services in two ways:
Administration fees and finance charges. Service fee typically range from 1% to 3%
of annual turnover.
For the finance made available, factors levy a separate charge, similar to that of a
bank overdraft.
I.
The nature of the business, including considerations such as seasonal aspects, stability
of the products, whether the customer is a manufacturer or wholesaler.
II.
Annual sales volume of clients firm. As volume increases, the percentage charged
usually decline.
III.
Average size of order processed. Large orders are no more time consuming to process
than small orders and produce more revenue for the factor. Therefore, the factors
commission rate declines as the size of the individual order rises.
IV.
Creditworthiness of the clients customers. If the risk is relatively small, the factors
commission may be lower.
V.
Clients selling terms. If credit period is very lengthy, the factor must wait to collect
its receivables, this requires a higher fee.
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BENEFITS OF FACTORING
Factoring offers a number of benefits to the clients. Some of the important benefits are:
1. Elimination of bad debt a non-recourse factor will assume the risk of bad debt, thus
eliminating this expense from your income statement.
2. Professional collections - Not only will a good factor collect receivables in a professional
manner, but he will eliminate overhead associated with the collection process.
3. Unlimited capital Factoring is the only source of financing that grows with your sales. As
sales increase, more cash becomes available for you to use, which allows you to constantly
meet demand.
4. Take advantage of volume and early payment discounts With improved cash flow, you
will be in a position to take advantage of these discounts which directly affect the bottom
line.
5. No debt incurred Factoring is NOT a loan and therefore, you are not incurring any debt.
This keeps your balance sheet looking good, thereby making it easier to obtain other types
of financing or to sell the company.
6. Factoring is easy and fast The application required to establish a factoring relationship is
much simpler than other types of financing. No tax returns, financial statements, business
plans, or projections are needed.
7. No personal guarantees The company principals do not have to personally guarantee the
repayment of the funding. They usually have to guarantee against fraud or disputes, but not
against customers inability to pay.
8. Invoices are paid faster Factors generally report payment experiences to Dun & Bradstreet
or other credit agencies. A debtor who is aware of this will not want his credit impaired.
9. Credit screening A factor will provide you with credit information on new customers, thus
allowing you to make better credit decisions. Factoring may not be for everyone, but those
who are in the role of banker for their customers should at least take the time to weigh the
benefits of factoring to provide continued growth and stability.
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DISADVANTAGES
Queries and disputes may have to be referred on and may have a negative impact on your
available funding. For this reason, factoring works best when a business is efficient and there
are few disputes and queries.
The cost will mean a reduction in your profit margin on each order or service
fulfillment.
It may reduce the scope for other borrowing - book debts will not be available as
security.
Factors will restrict funding against poor quality debtors or poor debtor spread, so you
will need to manage these funding fluctuations.
To end an arrangement with a factor you will have to pay off any money they have
advanced you on invoices if the customer has not paid them yet. This may require
some business planning.
Some customers may prefer to deal directly with you.
How the factor deals with your customers will affect what your customers think of
you. Make sure you use a reputable company that will not damage your reputation.
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SBI Global Factors Ltd (SBIGFL), a subsidiary of State Bank of India, is Non Banking
Financial Company regulated by Reserve Bank of India. SBIGFL provides Domestic and
Export Factoring services under one roof. It is headquartered in Mumbai with 11 Branches
across India. SBIGFL aims to be India's premier factoring company.
History
SBIGFL has been created out of merger of two leading Factoring Companies viz. SBI Factors
& Commercial Services Pvt. Ltd & Global Trade Finance Ltd. in the year 2010. Post merger,
Company was renamed as 'SBI Global Factors Ltd.' with effect from 18th March 2010.
SBIGFL-Member of Factors Chain International:
Vendor Factoring Facility will be extended by SBIGFL to small players in the market,
supplying to those corporate having strong financials/external credit rating.
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The facility is primarily extended to Vendors with the Buyer (usually an Industry Major)
undertaking to settle the dues on the due date.
The Facility sanctioned to the Vendors will be With Recourse to them. The primary
liability to pay the invoices factored by SBIGFL will be that of the Buyer
2. EXPORT FACTORING
Need for Export Factoring:
International Business poses various risks and challenges like:
Risks arising out of non-payment, political risk, commercial risk, exchange control risks etc.
Lower realization in respect of sales against LCs inasmuch as the buyer is likely to deduct the
cost of establishing LCs.
Difficulties due to uniqueness of each geography with respect to currency, banking system,
local trade practices and legal system.
Here, Export Factoring provides an attractive alternative. SBIGFL covers credit risk of the
exporter under Two Factor model of FI. Under this model, there are four parties involved in a
transaction: the exporter (seller), the domestic factoring company (viz. export factor), the
foreign factoring company (viz. import factor) and the customer (buyer).
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3. DOMESTIC FACTORING
Domestic Factoring is a process of factoring of accounts receivables generated out of sales
within India. The Seller assigns to the Factor the accounts receivables arising out of sales to
buyers within the country on open account terms and receives payment there against to the
extent of 80-90% from the Factor, depending upon the credit terms.
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There should be a continuous sales flow on an ongoing basis with the same buyer or set of
buyer(s).
Credit sales to a buyer to be assigned to SBIGFL on a continuous basis, once the factoring
arrangement is in place.
Dealership factoring facility will be without recourse to the Seller. The facility will, however,
become with recourse to the Seller, in case of any commercial or quality dispute between the
Seller and the Buyer(Dealer ) or if the invoice is not accepted by the Buyer(Dealer).
SBIGFL will consider sanction of Dealership Factoring facility to the dealers, based on
strong recommendations of the Seller (Industry major) by way of a comfort letter, backed by
tripartite agreement.
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Though the enactment of the Factoring Regulation Act has potentially removed all the
major impediments that the factoring sector faced in the country, nevertheless, the
sector has few other items on its wish list, the primary among which are introduction
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of credit insurance in the factoring business and extending the scope of SARFAESI
Act to cover NBFCs for speedy enforcement of security interest. As regards credit
insurance, the Finance Minister, in the Union Budget 2013-14, has made an
announcement for setting up a Credit Guarantee Fund with SIDBI for factoring, with
a Rs 5 billion corpus. As far as extension of the provisions of the SARFAESI Act to
NBFC is concerned, the final call rests with the Government of India.
Low penetration of factoring business in the country still remains a challenge which
could be on account of lack of awareness among the users. With the necessary law
now in place, sincere attempts need to be made by the industry through its
associations and other fora for articulating the benefits of factoring as not just an
alternative source of finance but also an avenue for providing a bouquet of financial
services vis--vis traditional finance, to small scale industries. They should be able to
identify the untapped potential clientele, especially in various SME industry sectors,
and create awareness on how the higher cost of factoring vis--vis the traditional
finance is justifiable and cost effective for the businesses in the long run. Factoring
companies should also constantly endeavor to upgrade their expertise on both
technological front as also on the operational level for offering cost effective services
to their
Factoring in India
To you, as a provider of goods or services, this is a process where India Factoring pre-pays
against the credit invoices that you regularly raise on your established clients. In settlement of
this obligation, your clients pay India Factoring on the respective due dates directly.
How it works:
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Benefits :
You benefit from predictable cash flows linked directly to performed sales.
Readily convert credit receivables to cash, as India Factoring will provide pre-payment
immediately.
Quick turnaround times ensure incremental cash flow planning and management.
India Factoring can additionally provide credit assessment on customers, new or existing.
Free monthly Account Receivable reporting, sales ledger administration and debtor
follow-up.
Your "credit line" grows as your business expands. Extremely scalable form of leverage.
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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 cr. but large portion is untapped because of the
following reasons:
.
Bankers do not permit their Customer to Shift their Business to Factors: Every
businessman invariably has dealings with a bank. Hence, his banker does not permit
him to shift his account receivables business to a factor, but promises to meet his
requirements.
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The long held view that India is just a services hub is also changing fast. India's
manufacturing sector is making rapid strides and could really be the base for the next wave of
growth. There is a well-known saying in investment circles that you should invest in an
emerging economy when the first international airport is built and you should exit when the
second airport comes up i.e. exit at the first signal of over-investment. China may soon reach
the second airport stage. In the event.
1. India would make an even bigger potential growth story in the years to come. India is
evolving from a command economy focused on self-sufficiency to becoming a key
link in the global economic chain.
3. As the manufacturing base of a country expands, the scope for factoring also
increases. At the micro level, factoring is tailor-made for a company on the path of
high-octane growth; just as at the macro level it is suited for a growing economy like
India.
4. There is only one direction in which factoring can go in India: upwards. As the
awareness level about the benefits of factoring increases, factoring will spread its
wings across the length and breadth of the country.
LIMITATIONS
The basic disadvantage of is that it may lead to ruined relations with the customers
especially if factor engages in aggressive or unprofessional practices when collecting
accounts
Cost is another disadvantage; cost involved in factoring agreement may be more than
the cost of other methods of financing available in the business.
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CONCLUSION
Factoring should be used by the firms by keeping in view the financial position of the factor.
At the end it is to be concluded that factoring is now gaining its importance in India slowly
with the increase in customer's access to benefits of factoring. India's future in factoring
business seems to be luring on the facts obtained regarding the fast growth of 174 % in only 4
years .So for factoring to be successful in India government regulation/ policies need to be
modified further so that more and more private players can come forward to start up their
factoring business in India .Customer awareness about benefits of factoring is to be increased
further to fight back the global leaders in factoring business.
Factoring is nothing just financing the seller against his trade debts by the factor who is a
financial institution so that he may not face deficiency of working capital and may further go
for production process or for any other investment plan that is available before him as a
future opportunity.
Today, factoring industry in India is facing severe problems due to the absence of proper laws
and legislations although in February, 1994, RBI has permitted all banks to enter into
factoring business departmentally. Government agencies and PSUs neither promptly make
payments nor they pay interest on delayed payment. Legislation is required to
comprehensively support the establishment and operation of efficient and viable factoring
services in India. This is required to empower factors to recover money from defaulting
companies.
Proper legislation is required to exempt factoring firms from the provisions of money lending
legislations.
An open account, or open- end credit, is credit extended by the selling company under a plan
in which there is no formal documentation of the sales transactions, and the selling company
sends a regular statement to notify its customers of their outstanding credit amounts.
The knowledge about the benefits of the factoring should be made available to every business
entities especially to small scale and medium scale industries so that they can this facility at
the time of requirement of finance or any other type of services comes under the factoring.
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