FACTORING

Concept of factoring
Definition of factoring Process of factoring

Essential documents
Functions of factor Benefits of factoring Types of factoring Export factoring

CONCEPT
Factoring is a financial service designed to help he

companies to arrange the payment of their receivables in a better manner. Factoring is a service whereby receivables are purchased by the factor and a financial option for credit sales is effected. A factor is an agent who does things for his client for a consideration called commission. In factoring a company or firm converts its receivables into cash by selling them to a factoring agent or institution at a discount.

 DEFINITION : factoring means an arrangement

between a factor and his client that includes at least two of the following services to be provided by the factor: a) finance b) maintenance of accounts c) collection of debts d) protection against credit risk

 Once the sales transaction is completed between the firm

PROCESS

and the buyer, the factor starts realizing the sales proceeds. seller enters into an agreement with a factor whereby the factor provides the facility of debt collection and seller hands over the duly signed copy of invoice to the factor. 80% of the invoice value is given as advance by the factor and the remaining is paid against realization. Factor collects service charge and discount charge from the seller

SELLER

FACTOR

4. Statement 5. Payment

BUYER

ESSENTIAL DOCUMENTS
The invoice, bills by the seller with a mention of factoring

service A written statement by the seller to ensure that bills are free from any charges, lein, 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 the transaction between buyer and seller is complete.

FUNCTIONS OF THE FACTOR

Assumption of credit risk
Maintenance of sales ledger Collection of accounts receivables

Finance of trade debt

Provision of advisory services Credit analysis of the customer

BENEFITS OF FACTORING
Immediate increase in cash flow Less cost

Professional collections
Invoice processing Offer credit terms to customers

Sources of finance
Credit screening

BENEFITS OF FACTORING
Immediate increase in cash flow Less cost

Professional collections
Invoice processing Offer credit terms to customers

Sources of finance
Credit screening

TYPES OF FACTORING
Recourse And Non Recourse Factoring: in former a

factor has a recourse to a client if the receivable factored becomes irrecoverable. if there is default the charge plus interest on the amount for the period, are collected by a factor from the client and no recourse is available in the latter. Advance And Maturity Factoring: in former a factor provides advance against factored receivables at an agreed interest rate and in latter no financial assistance is made available to the client and client gets the entire amount at maturity.

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 Undisclosed And Disclosed Factoring: in former a

clients customer are not aware of the factoring agreement between the client and the factor and in disclosed factors name is disclosed in the invoice Domestic And International Factoring: in domestic all the parties are from same country and in international there are four parties i.e. exporter, importer, importer factor, exporter factor Limited Factoring And Full Factoring: in former a factor discounts only certain invoices on a selected basis and under full factoring a factor renders full services to client

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Export factoring
Factoring for export companies that sell goods and

services to customers outside India is called export factoring. Agreements are made between the factoring company in the sellers country, exporter (client) and the export factor. Export factor is a factoring company in the sellers country who purchases (factors) the export documents. Import factor (IF) is a factoring company in the buyers country which handles collection and credit risks

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STEPS INVOLVED IN EXPORT FACTORING

A) the exporter ships the goods to the importer B) The exporter assigns his invoices through the export factor to the import factor who assumes the credit risk C) The export factor pre-pays the invoices D) The importer pays the proceeds to the import factor, who transfers the amount to the export factor E) The export factor deducts pre-payment already made and other charges, and pays the balance proceeds to the exporter

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