Amity Business School

Factoring Services

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 Amity Business School

Definition: In factoring services, collection of dues from one party is

ensured through the intervention of a factor. Factoring relationship
between the client and the factor.
Factoring is defined as “ buying the receivables of a company for a
value”
Thus factoring is a debt collection and financial service designed t
improve the client’s cash flow by turning his sales invoices into
ready cash.
It ensures smooth and healthy cash flow to a company.
Factoring is also a means to prevent sickness in industry.
It improves payment culture in the units.
The administrative cost to the companies in terms of book keeping and
credit control is saved and so is the drudgery of folllowup of debts.
The biggest advantage is that factoring helps to solve the working
capital problems of the country.

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 Amity Business School

MECHANICS OF FACTORING

CLIENT 1) Places Order CUSTOMER

(Seller) (Buyer)
3) Delivery of goods & invoice
with Notice to pay Factor

8) Payment
5) Pre payment
up to 80% 9) Balance 7) Follow-up, if
amount unpaid by
due date

ixation
f Customer
imit

6) Monthly
4) Copy of Statements
Invoice

FACTOR

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 Amity Business School

Factoring Services:
Types of factoring:
• Limited factoring
• Selected buyer based factoring
• Selected seller based factoring
• Factoring with recourse
• Maturity factoring
• Full factoring

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 Factoring services rendered:
Amity Business School

• Purchase of book debts and receivables

• Administration of sales ledger of the client
• Prepayment of debts partially or fully
• Collection of book debts or receivables with or
without document
• Covering the credit risk of the suppliers
• Dealing in book debts of customers without
recourse

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 Mechanics of operation of factoring:
Amity Business School

• Assess the credit standing of the client

• Set a credit risk limit and open a line of credit
• Factor fixes the limit to credit exposure and time periods
• Clients sells the goods to the customer and invoices the bills
assigning them to be aid to the factor
• Copies of invoice and receipted delivery challans are handed
over to the factor for further action
• Factor provides the payment up to 80% of value of invoice
after scrutiny of the documents
• Customer who purchased has to provide the rest 20% of the
value
• Factor sends statements for the bills purchased and
collections made and charges debited to the client.

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 What is forfeiting?
Amity Business School

Forfeiting is the conversion of credit bills into cash by

discounting them. Only foreign bills are involved in
the transactions.
Bills for the supply of raw materials include:
- of inputs
- of capital goods
Earlier consortium lending and government to
government lending is replaced now by the
forfeiting. It is discounting at fixed rate of bills of
trade and involves providing finance for any type of
and duration of international trade flow

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 Factoring vs Forfeiting
Amity Business School

1. Forfeiting applies to international trade only, while factoring refers to

domestic bills – purchase and discount
2. Risk taken are risks of debtor , debtor country, currency risk, goods t sea
etc- these are specific to forfeiting
3. Forfeiting is done through EXIM bank or in collaboration with foreign
forfeiting agency in foreign country
4. Forfeiting involves accepting the above risks and discounting the
bills/promissory notes and other documents in international trade thereby
making a credit sale by exporter by cash sale in practice
5. Forfeiting is either with recourse or without recourse mostly, the
preference of exporter is for forfeiting without recourse ,in which the risk
is borne by the forfeiting agency
6. Conversion of credit bills to cash – only foreign bills are used through
foreign agencies, or importers in the importing county or in a third country
7. RBI permission was granted to EXIM bank for forfeiting, alongwith other
services, it renders to the exporters

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 Factoring and Balance sheet:
Amity Business School

Impact of factoring on the balance sheet entries :

Current liabilities Amount Current assets Amount
(Rs.Crores) (Rs.Crores)

Bank borrowing 70 Inventory 100

against inventory
Against receivables 40 Receivables 80
Total 110 Total 180
Other current liabilities 40 Other current assets 20

Net working capital 50

200 200

Original current ratio 1.33:1- (200:150)

Assets of receivables of 80 are purchased by the factoring agency. Factor pays 80% of this(64) to
the client. Due from factor remains 16.The new balance sheet will appear as follows:

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 New Balance Sheet:
Amity Business School

Current Amount Current assets Amount

Liabilities
Bank borrowings 70 Inventory 100
against inventory
Other current liabilities 16 Receivable (due from 16
factors)
New working capital 50 Other current assets 20
136 136

New current ratio is 1.58:1------- (136 : 86)

The current ratio is better for the client and his credit
rating goes up before public eye.
Bills purchased by the factor will be off balance sheet
item for the factor. If it is with recourse, it appears as a
contingent liability 10
 Amity Business School

DISCOUNTING, FACTORING AND

FORFEITING
• Factoring – Meaning – Definition
• Modus Operandi
• Terms and Conditions
• Functions
– Purchase and collection of debts
– Sales ledger management
– Credit investigation and undertaking of credit risk
– Provision of finance against debts
– Rendering consultancy services

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 Amity Business School

TYPES OF FACTORING
• Full service factoring or without recourse factoring
• With resource factoring
• Maturity factoring
• Bulk factoring
• Invoice factoring
• Agency factoring
• International factoring
• Suppliers guarantee factoring
• Limited factoring
• Buyer based factoring
• Seller based factoring

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 Amity Business School

PRICING OF FACTORING SERVICES

• Factoring fees or Administrative charges
• Discount Charges

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 Amity Business School

FACTORING FEES

• Sales ledger administration

• Credit control administration
• Bad debt administration from 1% to 2.5% of the projected
turnover

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 Amity Business School

The quantum of levy actually depends upon several factors

as :–

• Reputation of the client as well as the debtors

• Nature of the industry to which the client belongs
• Volume of sales per annum
• Terms of sales
• Average invoice value
• Security available to the factor
• Type of factoring service offered
• Profit margin

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 Amity Business School

DISCOUNTING CHARGES

• This charge is normally linked with the base rate

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 Amity Business School

COSTING AND PRICING TECHNIQUE

• Cost-plus pricing strategy is adopted

• Factoring charge = Cost + Profit

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 Amity Business School

COST SHEET FOR FACTORING SERVICE

(A) Direct cost
Per invoice amount ……..
Per active account ……..
Per debtor account ……..
Per client …….. % of turnover
Bad debt provision …….. % of turnover

Total Direct Cost …………..

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 Amity Business School

(B) Administrative Cost ……. % of turnover

(C) Total Factoring Cost = A+B

(D) Profit = ……. % of turnover

(E) Required Factoring = (C+D/Total Turnover)*100

Charge
= % of turnover

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 Amity Business School

ACCOUNTING SYSTEM

• Sales ledger control

• Debt Purchase Account – Master Control Account
• Client Current Account
• Bank Account – separately for each customer

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 Amity Business School

ACCOUNTING PROCEDURE

• When invoices are assigned

• When payment is made to client
• When payment is made by debtors
• When credit notes if any are assigned

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 Amity Business School

BENEFITS
• Financial service
• Collection service
• ‘Credit Risk’ service
• Provision of expertised ‘Sales ledger management’ service
• Consultancy service
• Economy in servicing
• Off–balance sheet financing
• Trade benefits
• Miscellaneous services

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