Factoring Or Receivable Financing
SANJAY MEHROTRA ACA,MBA
What is Factoring?
Parties Involved
• Buyers of the goods(i.e. Customers) •Sellers of the goods(i.e. Client) •Factor
Process
Customer
credit sale of goods
Client
Invoice
Pays the balance amount
Pays the amount (In recourse type customer pays through client)
Submit invoice copy
Factor
Payment up to 80% initially
Function of Factor • To provide Finance against book debts
• Collect cash against Receivables on due date • Provide protection to clients • provide Information to clients
Types of Factoring
• Full service factoring • Resource factoring • Maturity factoring • Invoice factoring • Agency factoring
Advantages of Factoring
• Client receives immediate cash against cash • Reduces administrative cost and time • Eliminate losses on bad debt • Client can avail advisory services from factor
Disadvantages
• Image of client may suffer • some customer may prefer to deal directly • have to pay extra to remove liability
Cost of Factoring
Two types of costs in factoring services:1. Service Fee or Charges 2. Discount Charges
EXPORT FACTORING
offered to the exporters (clients) who sell their products or services to the importers (customers) in other countries on open account terms having a credit period ranging from 60 to 180 days.
Four different types of arrangements are possible for export factoring :
a) Two Factor System b) Single (Direct) Factoring System c) Direct Export Factoring d) Direct Import Factoring
Precautions to be taken by the Export Factor
Moblise Funds at the most affordable cost Factor must be in a position to absorb credit risk. Follow uniform rules to operate in international markets.
RBI Guidelines for banks to undertake factoring services
• frame an appropriate policy • should be undertaken by selected branches of banks • should be treated as par to loan • maintain a balanced portfolio of finance receivable vis-à-vis credit portfolio
Case Study
• Credit Sales =80 Lakhs • Average Collection Period =80 days • Bad debt losses=1% of credit sales • Cost of Administrating Credit Sales=Rs 120000 p.a • Factor’s Commission= 2% • Factor Pay Advance at an interest rate of 18% • With holding 10% as reserve.