FACTORING

Recievebles are constitute important role in portion

ofcurrent asset. There are two problems Raising of fund to financial receivebles Collection and defaults

FACTORING

Factoring is of recent origin in Indian Context. Kalyana Sundaram Committee recommended introduction of factoring in 1989. Banking Regulation Act, 1949, was amended in 1991 for Banks setting up factoring services. SBI/Canara Bank have set up their Factoring Subsidiaries: SBI Factors Ltd., (April, 1991) CanBank Factors Ltd., (August, 1991). RBI has permitted Banks to undertake factoring services through subsidiaries.

Meaning..
Factoring is a financial transaction whereby a

business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. One of the oldest forms of business financing, factoring is the cash-management tool of choice for many companies. Factoring is very common in certain industries, such as the clothing industry, where long receivables are part of the business cycle.

WHAT IS FACTORING ?
Factoring is the Sale of Book Debts by a firm (Client) to a financial institution (Factor) on the understanding that the Factor will pay for the Book Debts as and when they are collected or on a guaranteed payment date. Normally, the Factor makes a part payment (usually upto 80%) immediately after the debts are purchased thereby providing immediate liquidity to the Client.

PROCESS OF FACTORING

CLIENT

CUSTOMER

FACTOR

So, a Factor is,

a)
b) c)

A Financial Intermediary That buys invoices of a manufacturer or a trader, at a discount, and Takes responsibility for collection of payments.

The parties involved in the factoring transaction are:a) b) c)

Supplier or Seller (Client) Buyer or Debtor (Customer) Financial Intermediary (Factor)

al

features
Factoring is a service of financial nature.it

involves the conversion of credit bills into cash.ac rece and other credit dues resulting from credit sales appear in the books of accounts The factor purchases the credit/receivables and collects them on the due date. Risk associated with cr are assumed by factor A factor is a financial institution. It may be a co mmercial bank or financial company.it offers services relating to management and financing of debt.it act as intermediary.

 A factor specializes in handling and collecting

receivables in an efficient manner. Factoring is a techniques of receivables management. it is used to release fund tied up in receivables and solve the problems relating to collection, delay and defaults of receivables.

Functions
Provisions of finance-receivebles or book debt is

the subject matter of factoring.a factor buys the book debts of his cient. 80% of the value of receivebles as advances to the client. Administration of sales ledger-factor maintain the clients sales ledger. When credit sales take place , the firm prepare two copies of invoice. Entries are made in the ledger under open item method

 Collection of receivables.-the main function of

factor is to cllect the factors on behalf of the client and to relieves him from all tension and problems associated with credit collection. Protection against risk.- all risk relating to the receivables will be assumed by the facto Advisory services. - these services arises out of the close relation ship between a factor and a client . The factor has better knowledge and wide experience in the field of finance.

Advantages..
Improves efficiency.

Fact is an important tool for efficient receivable management.it gives specilisedservices with regard to sales ledger administrationcredit control etc. Higher credit standing Factoring generate cash for the selling fiirm. It can use this cash for other purposes. With advance payment made by factor it is possible to clined to pay off his liabilities

 Reduces cost The client need not have special administrative

setup look after credit control, hence it saves manpower ,time and effort

Advisory service- it is the better mangement of

recevebles .the factor assess the financial operationl and managerial capability of customer.

SERVICES OFFERED BY A FACTOR

1. 2.

Follow-up and collection of Receivables from Clients. Purchase of Receivables with or without recourse.

3.
4.

Help in getting information and credit line on customers (credit protection)

Sorting out disputes, if any, due to his relationship with Buyer & Seller.

PROCESS INVOLVED IN FACTORING

Client concludes a credit sale with a customer. Client sells the customers account to the Factor and notifies the customer. Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance. Factor maintains the customers account and follows up for payment. Customer remits the amount due to the Factor. Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.

MECHANICS OF FACTORING
The Client (Seller) sells goods to the buyer and prepares invoice with a

notation that debt due on account of this invoice is assigned to and must be paid to the Factor (Financial Intermediary). receipt of goods by buyer, to the Factor.

The Client (Seller) submits invoice copy only with Delivery Challan showing

The Factor, after scrutiny of these papers, allows payment (,usually upto 80%

of invoice value). The balance is retained as Retention Money (Margin Money). This is also called Factor Reserve.

The drawing limit is adjusted on a continuous basis after taking into account

the collection of Factored Debts.

credited to the Clients Account.

Once the invoice is honoured by the buyer on due date, the Retention Money

Till the payment of bills, the Factor follows up the payment and sends regular

statements to the Client.

CHARGES FOR FACTORING SERVICES

Factor charges Commission (as a flat percentage of value of Debts purchased) (0.50% to 1.50%) Commission is collected up-front.

For making immediate part payment, interest charged. Interest is higher than rate of interest charged on Working Capital Finance by Banks.
If interest is charged up-front, it is called discount.

TYPES OF FACTORING

Recourse Factoring Non-recourse Factoring

Maturity Factoring
Cross-border Factoring

RECOURSE FACTORING
Upto 75% to 85% of the Invoice Receivable is factored. Interest is charged from the date of advance to the date of collection. Factor purchases Receivables on the condition that loss arising on account of non-

recovery will be borne by the Client.

Credit Risk is with the Client.

Factor does not participate in the credit sanction process.

In India, factoring is done with recourse.

NON-RECOURSE FACTORING
Factor purchases Receivables on the condition that the Factor has no

recourse to the Client, if the debt turns out to be non-recoverable.

Credit risk is with the Factor. Higher commission is charged. Factor participates in credit sanction process and approves credit limit

given by the Client to the Customer.

In USA/UK, factoring is commonly done without recourse.

MATURITY FACTORING
Factor does not make any advance payment to the Client. Pays on guaranteed payment date or on collection of Receivables.

Guaranteed payment date is usually fixed taking into account previous

collection experience of the Client.

Nominal Commission is charged.

No risk to Factor.

CROSS - BORDER FACTORING

It is similar to domestic factoring except that there are four parties, viz.,

a) b) c) d)

Exporter, Export Factor, Import Factor, and Importer.

It is also called two-factor system of factoring.

Exporter (Client) enters into factoring arrangement with Export Factor in

his country and assigns to him export receivables. Export Factor enters into arrangement with Import Factor and has arrangement for credit evaluation & collection of payment for an agreed fee. Notation is made on the invoice that importer has to make payment to the Import Factor. Import Factor collects payment and remits to Export Factor who passes on the proceeds to the Exporter after adjusting his advance, if any. Where foreign currency is involved, Factor covers exchange risk also.

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