Factoring and Forfaiting
Content
Factoring and Forfaiting
Shyam Prakash U [email protected]
Intro
Firms can benefit by selling their accounts receivables for cash. To increase their cash flows and reduce their outstanding recievables. Factoring and Forfaiting are services that cater to these requirements of firms and assist in domestic and international trade.
Factoring
In factoring , factor ( a bank or a FI ) takes the responsibility of collecting the accounts receivables for a client ( firm ). According to the arrangement, the client sells invoiced receivables at a discount to the factor. This helps the firm to immediately raise finance for any working capital requirement.
Factoring
The factor provides services such as financing, collections, and sales ledger administration. It is up to the factor to accept the credit risk involved in the transaction. Factoring is an ongoing arrangement and not a one time transaction.
Advantages of Factoring
Replaces high cost credit Enables purchases on cash basis for availing cash discounts. Instant finance against the invoice. Improves cash flow factoring requires a very low margin ( upto 20% ) thereby improving cash flow. Large credit / grace period Enables customer. Invoice follow up the factor follows up for each invoice for payment after the due date and there after.
Advantages of Factoring
MIS reports - the factor takes care of the MIS reports and the sales ledger administration. Increased ROI accelerates the receivables turnover and improves operating cycle, resulting in production, larger sales, higher profits and increased ROI.
Types of Factoring
Recourse Factoring the client has to bear the risk of bad debts or non payment of invoice. Non recourse factoring the factor has to bear the risk of bad debts. The factor provides both finance and credit protection.
Domestic Factoring
Receivables arising out of domestic trade The supplier or borrower draws bills of exchange for goods supplied and the purchaser accepts it. Post acceptance the factor makes a prepayment of 80% of the invoice (-) the discount charges at normal interest rates. The payment is for the period of bill of exchange to the supplier. The balance payment is made after the collections. If the purchaser fails the supplier makes good the payment The maximum permissible debt period for factoring is 150 days inclusive of 60 days of grace. Various MIS reports like Debtor ageing analysis, Weekly Statement of accounts, Sales analysis and Statement of outstanding invoices and given to the seller by the factor.
International Factoring
Two factors are prevalent: Import factor and export factor.
± Export factor looks at exporter financing and sales administration ± Import factor is interested in evaluating the buyer, collecting money on time and at the same time ensuring that he is protected against default.
International Factoring
The importer places an order with the exporter. The exporter requests the export factor for limit approval on the importer. The export factor, in turn forwards this request to the import factor in the importer s country. The import factor evaluates the importer and conveys its approval to the export factor, who in turns conveys the commencement of the arrangement.
International Factoring
The exporter delivers the goods to the importer. The exporter produces the documents to the export factor. The export factor disburses the funds to the exporter upto the prepayment amount decided and at the same time forwards the documents to the import factor. The importer on the due date of the invoice pays the import factor who in turn remits the payment to the export factor. The export factor applies the received funds to the outstanding amount of the advance. The exporter receives the balance payment.
Forfaiting
The word is derived from the French word a forfait which mean to surrender or relinquish a right to someone. The exporter gives up his right to future export receivables in return for cash from an intermediary called a forfaiter.
Forfaiting
It involves discounting of trade receivables such as drafts drawn under LCs, Bills of exchange, promissory notes, or other freely negotiable instruments. The discounting is done on no recourse basis to the exporter, in case fails to pay on the due date. Its generally used for medium and long term receivables. Its usually extended for capital goods and large projects and is carried out on single transaction basis.
Mechanism of Forfaiting
The exporter signs a contract with the importer for sales of goods at a negotiated price and credit period. The exporter informs the importer that he would discount the sales receivables with a forfaiter and assign the receivables to the forfaiter. The importer s bank issues a LC in favor of the exporter. The exporter enters into a forfaiting contract. The exporter draws debt instrument accepted by the importer.
Mechanism of Forfaiting
The unconditional stand by LC of the importer s bank back the debt instuments. The forfaiter sends these documents to the importer s bank, who inturn notifies reciept. The forfaiter pays 100% to the exporter after discount and other incidental charges as per the contract. The forfaiter then takes over the responsibility for claiming the debt from the importer and holds the notes till full maturity.
Docs required by the forfaiter from the Exporter
Under the forfaiting agreement, a promissory note, bill of exchange is issued for each installment of the suppliers credit, documenting the existence of the exporter s claim on the importer, if it is an unconditional, irrevocable, and divorced from the underlying trade transaction.
Docs required by the forfaiter from the Exporter
Copy of the supply contract LC confirming to the UCPDC Copy of the signed commercial invoice Copy of the shipping documents like bill of lading , airway bill etc. Letter of assignment and notification to the guarantor.
Advantages of Forfaiting
Exporters can gain a lot by using forfating as a financing method Full financing; provides 100% financing without recourse and not occupying the exporter s line of credit. Cash flow improvement; improves cash flow by converting receivables into cash inflows. Cost saving; savings on administrative costs. Trade Opportunity; increases the trade opportunity as the exporter is able to grant credit and become more competitive. Realisation of Price transfer; helps to realise price transfer as the exporter can also transfer the corresponding finance cost into the sale price. Risk avoidance; avoids various risk arising from deferred payments
Shyam Prakash U [email protected]
Intro
Firms can benefit by selling their accounts receivables for cash. To increase their cash flows and reduce their outstanding recievables. Factoring and Forfaiting are services that cater to these requirements of firms and assist in domestic and international trade.
Factoring
In factoring , factor ( a bank or a FI ) takes the responsibility of collecting the accounts receivables for a client ( firm ). According to the arrangement, the client sells invoiced receivables at a discount to the factor. This helps the firm to immediately raise finance for any working capital requirement.
Factoring
The factor provides services such as financing, collections, and sales ledger administration. It is up to the factor to accept the credit risk involved in the transaction. Factoring is an ongoing arrangement and not a one time transaction.
Advantages of Factoring
Replaces high cost credit Enables purchases on cash basis for availing cash discounts. Instant finance against the invoice. Improves cash flow factoring requires a very low margin ( upto 20% ) thereby improving cash flow. Large credit / grace period Enables customer. Invoice follow up the factor follows up for each invoice for payment after the due date and there after.
Advantages of Factoring
MIS reports - the factor takes care of the MIS reports and the sales ledger administration. Increased ROI accelerates the receivables turnover and improves operating cycle, resulting in production, larger sales, higher profits and increased ROI.
Types of Factoring
Recourse Factoring the client has to bear the risk of bad debts or non payment of invoice. Non recourse factoring the factor has to bear the risk of bad debts. The factor provides both finance and credit protection.
Domestic Factoring
Receivables arising out of domestic trade The supplier or borrower draws bills of exchange for goods supplied and the purchaser accepts it. Post acceptance the factor makes a prepayment of 80% of the invoice (-) the discount charges at normal interest rates. The payment is for the period of bill of exchange to the supplier. The balance payment is made after the collections. If the purchaser fails the supplier makes good the payment The maximum permissible debt period for factoring is 150 days inclusive of 60 days of grace. Various MIS reports like Debtor ageing analysis, Weekly Statement of accounts, Sales analysis and Statement of outstanding invoices and given to the seller by the factor.
International Factoring
Two factors are prevalent: Import factor and export factor.
± Export factor looks at exporter financing and sales administration ± Import factor is interested in evaluating the buyer, collecting money on time and at the same time ensuring that he is protected against default.
International Factoring
The importer places an order with the exporter. The exporter requests the export factor for limit approval on the importer. The export factor, in turn forwards this request to the import factor in the importer s country. The import factor evaluates the importer and conveys its approval to the export factor, who in turns conveys the commencement of the arrangement.
International Factoring
The exporter delivers the goods to the importer. The exporter produces the documents to the export factor. The export factor disburses the funds to the exporter upto the prepayment amount decided and at the same time forwards the documents to the import factor. The importer on the due date of the invoice pays the import factor who in turn remits the payment to the export factor. The export factor applies the received funds to the outstanding amount of the advance. The exporter receives the balance payment.
Forfaiting
The word is derived from the French word a forfait which mean to surrender or relinquish a right to someone. The exporter gives up his right to future export receivables in return for cash from an intermediary called a forfaiter.
Forfaiting
It involves discounting of trade receivables such as drafts drawn under LCs, Bills of exchange, promissory notes, or other freely negotiable instruments. The discounting is done on no recourse basis to the exporter, in case fails to pay on the due date. Its generally used for medium and long term receivables. Its usually extended for capital goods and large projects and is carried out on single transaction basis.
Mechanism of Forfaiting
The exporter signs a contract with the importer for sales of goods at a negotiated price and credit period. The exporter informs the importer that he would discount the sales receivables with a forfaiter and assign the receivables to the forfaiter. The importer s bank issues a LC in favor of the exporter. The exporter enters into a forfaiting contract. The exporter draws debt instrument accepted by the importer.
Mechanism of Forfaiting
The unconditional stand by LC of the importer s bank back the debt instuments. The forfaiter sends these documents to the importer s bank, who inturn notifies reciept. The forfaiter pays 100% to the exporter after discount and other incidental charges as per the contract. The forfaiter then takes over the responsibility for claiming the debt from the importer and holds the notes till full maturity.
Docs required by the forfaiter from the Exporter
Under the forfaiting agreement, a promissory note, bill of exchange is issued for each installment of the suppliers credit, documenting the existence of the exporter s claim on the importer, if it is an unconditional, irrevocable, and divorced from the underlying trade transaction.
Docs required by the forfaiter from the Exporter
Copy of the supply contract LC confirming to the UCPDC Copy of the signed commercial invoice Copy of the shipping documents like bill of lading , airway bill etc. Letter of assignment and notification to the guarantor.
Advantages of Forfaiting
Exporters can gain a lot by using forfating as a financing method Full financing; provides 100% financing without recourse and not occupying the exporter s line of credit. Cash flow improvement; improves cash flow by converting receivables into cash inflows. Cost saving; savings on administrative costs. Trade Opportunity; increases the trade opportunity as the exporter is able to grant credit and become more competitive. Realisation of Price transfer; helps to realise price transfer as the exporter can also transfer the corresponding finance cost into the sale price. Risk avoidance; avoids various risk arising from deferred payments
