Factoring
Content
Definition
Robert W. Johnson in his book ³Financial Management´ states, ³Factoring is a service involving the purchase by a financial organisation called a factor, of receivables owned to manufacturers and distributors by their customers, with the factor assuming full credit and collection responsibilities´.
EVOLUTION OF FACTORING
´
The term factor has its origin from the Latin word, µFacere¶meaning to get things done. The dictionary defines a factor as an agent particularly a mercantile agent. Factoring has a long fascinating history which traces back through several centuries.
´
In the early stages factors were itinerant merchants who were entrusted with merchandise belonging to others.
FUNCTIONS OF A FACTOR Administration of Sales Ledger ± The factor maintains the sales ledger in respect of each client. He performs the functions with regard to the administration of sales ledger such as ensuring that the invoices raised during the trade transactions of goods and services are genuine, updating the sales ledger with latest invoices raised and cash received, ensuring that the monthly statements are sent to all the concerned persons, reviewing the financial strength of the debtors at periodic intervals to ensure collectivity of debts, resolving the disputes between the clients and the customers, etc.
Collection of Receivables ± The factor collects the receivables on behalf of the client by the help of trained and experienced personnel, sophisticated infrastructure and improved technology.
Provision of Finance ± The factor purchases the book debts oh his client and debts are assigned in favour of the factor. 75% to 80% of the assigned debts is given as an advance to the client by the factor.
Protection Against Risk ± The factor fixes the credit limits (i.e. the limit up to which the client can sell goods to the customers) in respect of approved customers. Within these limits the factor undertakes to purchase all trade debts and assumes risk of default in payment by the customers.
Advisory Services ± The factor provides management services to the client. He informs the client about the additional business opportunities available, the changing business and financial profiles of the customers, the likelihood of coming recession, etc.
BENEFITS / IMPORTANCE OF FACTORING
Financial Service ± The factor purchases the book debts oh his client and debts are assigned in favour of the factor. 75% to 80% of the assigned debts is given as an advance to the client by the factor.
Collection Service ± The factor collects the receivables on behalf of the client by the help of trained and experienced personnel, sophisticated infrastructure and improved technology.
Credit Risk Service ± The factor fixes the credit limits (i.e. the limit up to which the client can sell goods to the customers) in respect of approved customers. Within these limits the factor undertakes to purchase all trade debts and assumes risk of default in payment by the customers.
Provision of Expertised µSales Ledger Management¶ Service ± The factor takes care of all the functions relating to the maintenance of sales ledger.
Consultancy Service ± The factor provides management services to the client. He informs the client about the additional business opportunities available, the changing business and financial profiles of the customers, the likelihood of coming recession, etc.
Economy in Servicing ± Factoring is a cheap source of finance to the client because the interest rate is charged only on the amount actually provided to the client, say, for instance, 80% of his total invoices and not on the total amount of the invoices. Thus, clients are able to get factoring services at economic rates.
Off ± Balance Sheet Financing ± Factoring is an off ± balance sheet means of financing. When the factor purchases the book debts of the client, these debts no longer exist on the current asset side of the balance sheet. It leads to reduction in debts and less collection problems. The client can utilise the money so received to reduce his current liabilities. It means an improved current ratio.
Trade Benefits ± Availability of ready cash against the bills enables the supplier to negotiate better prices for the inputs and also offer finer terms to customers. It ensures steady flow of inputs on the one hand and better market prospects on the other.
Miscellaneous Service ± The factors are able to render prompt service at reasonable rates because the operations of the factors are fully computerised. They spend more on M.I.S. analysis. They also build bigger credit library of debtors by means of collecting information about new debtors.
LIMITATIONS OF FACTORING
Over ± trading or mismanagement by the client Possible fraudulent acts by the clients in furnishing the main instrument ³invoice´ to the factor. Lack of professionalism and competence, underdeveloped expertise, resistance to change, etc. Rights of the factor resulting from purchase of trade debts are uncertain, not as strong as that in bills of exchange and are subject to settlement of discounts, returns and allowances. Small companies may not be suitable for entering into factoring contracts.
TYPES OF FACTORING
Full Service Factoring or Without Recourse factoring ± The entire responsibility falls on the shoulders of the factor since he assumes the credit risk. He cannot pass the responsibility to his client if the debtors fail to repay the debts. With Recourse Factoring ± The factor does not assume the credit risk. If the debtors do not repay their dues in time, such debts are automatically assigned to the client. Maturity Factoring or Collection Factoring ± The factor does not provide immediate cash payment to the client at the time of assignment of debts. He undertakes to pay cash as and when collections are made from the debtors.
Bulk Factoring or Disclosed factoring or Notified Factoring ± The factor provides finance after disclosing the fact of assignment of debts to the debtors concerned. Invoice Factoring or Confidential Invoice Discounting or Undisclosed Factoring ± The factor simply provides finance against invoices without undertaking any other functions. Agency Factoring ± The factor and the client share the work between themselves. The client has to look after the sales ledger administration and collection work. The factor has to provide finance and assume the credit risk. International Factoring ± The services of a factor in a domestic business are simply extended to international business.
Suppliers Guarantee Factoring ± This type of factoring is suitable for business establishments which sell goods through middlemen. The bills are assigned in favour of the factor who guarantees payments of those bill. This enables the supplier to earn profits without much financial involvement. Limited Factoring ± The factor discounts only selected invoices on merit basis and converts credit bills into cash in respect of those bills only. Buyer Based factoring ± The buyer approaches the factor to discount his bills. Seller based Factoring ± The seller, instead of discounting his bills, sells all his accounts receivables to the factor, after invoicing the customers.
PROCEDURAL ASPECTS IN FACTORING
Basically there are three parties to the factoring services as depicted below:
Buyer Client customer
factor
The Buyer ± The buyer enters into an agreement with the factor and negotiates he terms and conditions for the credit purchases. The buyer will receive delivery of goods along with the invoice and will make the payment to the factor on due date.
The Seller ± The seller enters into an agreement for the sales of goods on credit to the buyer. The seller sells the goods to the buyer. The seller gives instructions to the buyer to pay to the factor. The seller receives the balance payment after the deduction of all service charges.
The Factor ± The factor enters into an agreement with the seller for rendering the services to it. The factor makes the payment to the seller of 80% of the price of the debt. The factor receives the payment from the buyer after receiving all the service charges.
FINANCIAL ASPECTS OF FACTORING
Pricing of factoring services Factoring is a two fold service ³Fund based´ and ³Non ± fund based´. While pricing factoring services, the following components should be taken into account. Factoring fees or Administrative Charges ± This is charged mainly as administrative expenses for providing various services to the clients like sales ledger maintenance, credit control and bad debts administration. Generally, this charge varies between 1% to 2.5% of the projected turnover. Discount Charges ± For providing instant credit to the client by way of prepayment, some charges have to be levied are known as discount charges.
Costing and Pricing Technique Generally, cost plus pricing strategy is adopted for fixing the price for various services. Therefore Factoring Charge = Cost + Profit.
Cost Sheet for Factoring Service (A) Direct Cost Per Invoice Amount Per Active account Per Debtor account Per Client Bad debts provision Total Direct Cost (B) Administrative Cost © Total Factoring Cost = A + B ___________% of Turnover _____ C + D_____ * 100 Total Turnover ___________% of Turnover
___________ ___________ ___________ ___________% of Turnover ___________% of Turnover ___________% of Turnover ___________% of Turnover
(D) Profit = (E) Required Factoring Charge =
=
Accounting System A factor company keeps the following accounts to record the factoring transactions. Sales Ledger Control Account Debt Purchased Account Client Current Account Bank Account Passing of Journal Entries at different stages (1) When invoices are assigned (2) When payment (80% of invoice) is made to client (3) When payment is made by debtors (4) When credit notes are assigned
FORFAITING
´
The forfaiting owes its origin to a French term µforfait¶ which means to forfeit (or surrender) one¶s rights on something to some one else.
´
Under this mode of export finance, the exporter forfaits his rights to the future receivables and the forfaiter loses recourse to the exporter in the event of nonpayment by the importer.
´
It is a trade finance extended by a forfaiter to an exporter/seller for an export/sale transaction involving deferred payment terms over a long period at a firm rate of discount.
´
Forfaiting is generally extended for export of capital goods, commodities and services where the importer insists on supplies on credit terms.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
1.Suitable for ongoing open account sales, not backed by LC or accepted bills or exchange. 2. Usually provides financing for short-term credit period of upto 180 days.
1.
Oriented towards single transactions backed by LC or bank guarantee.
2. Financing is usually for medium to long-term credit periods from 180 days upto 7 years though shorterm credit of 30±180 days is also available for large transactions.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
3.Requires a continuous arrangements between factor and client, whereby all sales are routed through the factor. 4. Factor assumes responsibility for collection, helps client to reduce his own overheads. 3. Seller need not route or commit other business to the forfaiter. Deals are concluded transaction-wise. 4. Forfaiter¶s responsibility extends to collection of forfeited debt only. Existing financing lines remains unaffected.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
5. Separate charges are applied for ² financing ² collection ² administration ² credit protection and ² provision of information. 5. Single discount charges is applied which depend on ² guaranteeing bank and country risk, ² credit period involved and ² currency of debt. Only additional charges is commitment fee, if firm commitment is required prior to draw down during delivery period.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
6. Service is available for domestic and export receivables. 7. Financing can be with or without recourse; the credit protection collection and administration services may also be provided without financing. 6. Usually available for export receivables only denominated in any freely convertible currency. 7. It is always µwithout recourse¶ and essentially a financing product.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
8. Usually no restriction on minimum size of transactions that can be covered by factoring . 9. Factor can assist with completing import formalities in the buyer¶s country and provide ongoing contract with buyers. 8. Transactions should be of a minimum value of USD 250,000. 9. Forfaiting will accept only clean documentation in conformity with all regulations in the exporting/importing countries
Factoring service in India is of recent origin. It owes its genesis to the recommendations of the Kalyanasundaram Study Group appointed by the RBI in 1989. Pursuant to the acceptance of these recommendations, the RBI issued guidelines for factoring services in 1990. The first factoring company ± SBI Factors and Commercial Ltd (SBI FACS) started operation in April 1991. This article highlights the important aspects of the factoring services in India.
The main recommendations of the Committee/Group are listed as follows: (1) Taking all the relevant facts into account, there is sufficient scope for introduction factoring services in India which would be complementary to the services provided by banks. (2) The introduction of export factoring services would provide additional facility to exporters.
(3) While quantification of the demand for factoring services has not
been possible, it is assessed that it would grow sufficiently so as to make factoring business a commercially viable proposition within a period of two/three years. (4) On the export front, there would be a fairly good availment of various services offered by export factors. (5) With a view to attaining a balanced dispersal of risks, factors should offer their services to all industries and all sectors in the economy.
(6) The pricing of various services by factors would essentially depend upon the cost of funds. Factors should attempt a mix from among the various sources of funds to keep the cost of funds as low as possible, in any case not exceeding 13.5 percent per annum, so that a reasonable spread is available. (7) The RBI could consider allowing factoring organizations to raise funds from the Discount and Finance House of India Ltd, as also from other approved financial institutions, against their usance promissory notes covering receivables factored by them, on the liens of revised procedure under bills discounting scheme. (8) The price for financing services would be around 16 per cent per annum and the aggregate price for all other services may not exceed 2.5 percent to 3 percent of the debts services.
(9) In the beginning only select promoter institutions/groups of individuals with good track record in financial services and competent management should be permitted to meter into this new field. (10) Initially the organizations may be promoted on a zonal basis. (11) There are distinct advantages in the banks being associated with handling of factoring business. The subsidiaries or associates of banks are ideally suited for undertaking this business; initially, it would be desirable to have only four or five organizations which could be promoted either individually by the leading banks or jointly by a few major banks having a large network of branches.
(12) Factoring activities could perhaps be taken up by the Small Industries Development Bank of India, preferably in association with one or more commercial banks. (13) The business community should first be educated through bank branches about the nature and scope of these services and the benefits accruing there from. (14) Factors cannot extend their services efficiently, effectively and economically without the support of computers, as quick and dependable means of communication. Concurrent with consideration of various aspects relating to commencement of factoring operations the promoters should initiate measures for organizing network of computers /dedicated lines the branches/agents in different parts of the country for accounting follow up remittance and other activities involved in factoring business.
(15)The Central Government and RBI should initiate appropriate measures immediately for setting up specialized agencies for credit investigations; until such agencies become fully operative, factors may have to rely on such information about clients/customers as could be collected through banks or other sources. (16) Since the suppliers would be able to obtain financial services from both banks and factors, it is necessary to provide for proper linkage between banks and factoring organizations. (17) The factoring of Small Scale Industrial (SSI) units could to be mutually beneficial to both factors and SSI units and the factors should make every effort to orient their strategy to crystallize, the potential demand for this sector.
Robert W. Johnson in his book ³Financial Management´ states, ³Factoring is a service involving the purchase by a financial organisation called a factor, of receivables owned to manufacturers and distributors by their customers, with the factor assuming full credit and collection responsibilities´.
EVOLUTION OF FACTORING
´
The term factor has its origin from the Latin word, µFacere¶meaning to get things done. The dictionary defines a factor as an agent particularly a mercantile agent. Factoring has a long fascinating history which traces back through several centuries.
´
In the early stages factors were itinerant merchants who were entrusted with merchandise belonging to others.
FUNCTIONS OF A FACTOR Administration of Sales Ledger ± The factor maintains the sales ledger in respect of each client. He performs the functions with regard to the administration of sales ledger such as ensuring that the invoices raised during the trade transactions of goods and services are genuine, updating the sales ledger with latest invoices raised and cash received, ensuring that the monthly statements are sent to all the concerned persons, reviewing the financial strength of the debtors at periodic intervals to ensure collectivity of debts, resolving the disputes between the clients and the customers, etc.
Collection of Receivables ± The factor collects the receivables on behalf of the client by the help of trained and experienced personnel, sophisticated infrastructure and improved technology.
Provision of Finance ± The factor purchases the book debts oh his client and debts are assigned in favour of the factor. 75% to 80% of the assigned debts is given as an advance to the client by the factor.
Protection Against Risk ± The factor fixes the credit limits (i.e. the limit up to which the client can sell goods to the customers) in respect of approved customers. Within these limits the factor undertakes to purchase all trade debts and assumes risk of default in payment by the customers.
Advisory Services ± The factor provides management services to the client. He informs the client about the additional business opportunities available, the changing business and financial profiles of the customers, the likelihood of coming recession, etc.
BENEFITS / IMPORTANCE OF FACTORING
Financial Service ± The factor purchases the book debts oh his client and debts are assigned in favour of the factor. 75% to 80% of the assigned debts is given as an advance to the client by the factor.
Collection Service ± The factor collects the receivables on behalf of the client by the help of trained and experienced personnel, sophisticated infrastructure and improved technology.
Credit Risk Service ± The factor fixes the credit limits (i.e. the limit up to which the client can sell goods to the customers) in respect of approved customers. Within these limits the factor undertakes to purchase all trade debts and assumes risk of default in payment by the customers.
Provision of Expertised µSales Ledger Management¶ Service ± The factor takes care of all the functions relating to the maintenance of sales ledger.
Consultancy Service ± The factor provides management services to the client. He informs the client about the additional business opportunities available, the changing business and financial profiles of the customers, the likelihood of coming recession, etc.
Economy in Servicing ± Factoring is a cheap source of finance to the client because the interest rate is charged only on the amount actually provided to the client, say, for instance, 80% of his total invoices and not on the total amount of the invoices. Thus, clients are able to get factoring services at economic rates.
Off ± Balance Sheet Financing ± Factoring is an off ± balance sheet means of financing. When the factor purchases the book debts of the client, these debts no longer exist on the current asset side of the balance sheet. It leads to reduction in debts and less collection problems. The client can utilise the money so received to reduce his current liabilities. It means an improved current ratio.
Trade Benefits ± Availability of ready cash against the bills enables the supplier to negotiate better prices for the inputs and also offer finer terms to customers. It ensures steady flow of inputs on the one hand and better market prospects on the other.
Miscellaneous Service ± The factors are able to render prompt service at reasonable rates because the operations of the factors are fully computerised. They spend more on M.I.S. analysis. They also build bigger credit library of debtors by means of collecting information about new debtors.
LIMITATIONS OF FACTORING
Over ± trading or mismanagement by the client Possible fraudulent acts by the clients in furnishing the main instrument ³invoice´ to the factor. Lack of professionalism and competence, underdeveloped expertise, resistance to change, etc. Rights of the factor resulting from purchase of trade debts are uncertain, not as strong as that in bills of exchange and are subject to settlement of discounts, returns and allowances. Small companies may not be suitable for entering into factoring contracts.
TYPES OF FACTORING
Full Service Factoring or Without Recourse factoring ± The entire responsibility falls on the shoulders of the factor since he assumes the credit risk. He cannot pass the responsibility to his client if the debtors fail to repay the debts. With Recourse Factoring ± The factor does not assume the credit risk. If the debtors do not repay their dues in time, such debts are automatically assigned to the client. Maturity Factoring or Collection Factoring ± The factor does not provide immediate cash payment to the client at the time of assignment of debts. He undertakes to pay cash as and when collections are made from the debtors.
Bulk Factoring or Disclosed factoring or Notified Factoring ± The factor provides finance after disclosing the fact of assignment of debts to the debtors concerned. Invoice Factoring or Confidential Invoice Discounting or Undisclosed Factoring ± The factor simply provides finance against invoices without undertaking any other functions. Agency Factoring ± The factor and the client share the work between themselves. The client has to look after the sales ledger administration and collection work. The factor has to provide finance and assume the credit risk. International Factoring ± The services of a factor in a domestic business are simply extended to international business.
Suppliers Guarantee Factoring ± This type of factoring is suitable for business establishments which sell goods through middlemen. The bills are assigned in favour of the factor who guarantees payments of those bill. This enables the supplier to earn profits without much financial involvement. Limited Factoring ± The factor discounts only selected invoices on merit basis and converts credit bills into cash in respect of those bills only. Buyer Based factoring ± The buyer approaches the factor to discount his bills. Seller based Factoring ± The seller, instead of discounting his bills, sells all his accounts receivables to the factor, after invoicing the customers.
PROCEDURAL ASPECTS IN FACTORING
Basically there are three parties to the factoring services as depicted below:
Buyer Client customer
factor
The Buyer ± The buyer enters into an agreement with the factor and negotiates he terms and conditions for the credit purchases. The buyer will receive delivery of goods along with the invoice and will make the payment to the factor on due date.
The Seller ± The seller enters into an agreement for the sales of goods on credit to the buyer. The seller sells the goods to the buyer. The seller gives instructions to the buyer to pay to the factor. The seller receives the balance payment after the deduction of all service charges.
The Factor ± The factor enters into an agreement with the seller for rendering the services to it. The factor makes the payment to the seller of 80% of the price of the debt. The factor receives the payment from the buyer after receiving all the service charges.
FINANCIAL ASPECTS OF FACTORING
Pricing of factoring services Factoring is a two fold service ³Fund based´ and ³Non ± fund based´. While pricing factoring services, the following components should be taken into account. Factoring fees or Administrative Charges ± This is charged mainly as administrative expenses for providing various services to the clients like sales ledger maintenance, credit control and bad debts administration. Generally, this charge varies between 1% to 2.5% of the projected turnover. Discount Charges ± For providing instant credit to the client by way of prepayment, some charges have to be levied are known as discount charges.
Costing and Pricing Technique Generally, cost plus pricing strategy is adopted for fixing the price for various services. Therefore Factoring Charge = Cost + Profit.
Cost Sheet for Factoring Service (A) Direct Cost Per Invoice Amount Per Active account Per Debtor account Per Client Bad debts provision Total Direct Cost (B) Administrative Cost © Total Factoring Cost = A + B ___________% of Turnover _____ C + D_____ * 100 Total Turnover ___________% of Turnover
___________ ___________ ___________ ___________% of Turnover ___________% of Turnover ___________% of Turnover ___________% of Turnover
(D) Profit = (E) Required Factoring Charge =
=
Accounting System A factor company keeps the following accounts to record the factoring transactions. Sales Ledger Control Account Debt Purchased Account Client Current Account Bank Account Passing of Journal Entries at different stages (1) When invoices are assigned (2) When payment (80% of invoice) is made to client (3) When payment is made by debtors (4) When credit notes are assigned
FORFAITING
´
The forfaiting owes its origin to a French term µforfait¶ which means to forfeit (or surrender) one¶s rights on something to some one else.
´
Under this mode of export finance, the exporter forfaits his rights to the future receivables and the forfaiter loses recourse to the exporter in the event of nonpayment by the importer.
´
It is a trade finance extended by a forfaiter to an exporter/seller for an export/sale transaction involving deferred payment terms over a long period at a firm rate of discount.
´
Forfaiting is generally extended for export of capital goods, commodities and services where the importer insists on supplies on credit terms.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
1.Suitable for ongoing open account sales, not backed by LC or accepted bills or exchange. 2. Usually provides financing for short-term credit period of upto 180 days.
1.
Oriented towards single transactions backed by LC or bank guarantee.
2. Financing is usually for medium to long-term credit periods from 180 days upto 7 years though shorterm credit of 30±180 days is also available for large transactions.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
3.Requires a continuous arrangements between factor and client, whereby all sales are routed through the factor. 4. Factor assumes responsibility for collection, helps client to reduce his own overheads. 3. Seller need not route or commit other business to the forfaiter. Deals are concluded transaction-wise. 4. Forfaiter¶s responsibility extends to collection of forfeited debt only. Existing financing lines remains unaffected.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
5. Separate charges are applied for ² financing ² collection ² administration ² credit protection and ² provision of information. 5. Single discount charges is applied which depend on ² guaranteeing bank and country risk, ² credit period involved and ² currency of debt. Only additional charges is commitment fee, if firm commitment is required prior to draw down during delivery period.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
6. Service is available for domestic and export receivables. 7. Financing can be with or without recourse; the credit protection collection and administration services may also be provided without financing. 6. Usually available for export receivables only denominated in any freely convertible currency. 7. It is always µwithout recourse¶ and essentially a financing product.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
8. Usually no restriction on minimum size of transactions that can be covered by factoring . 9. Factor can assist with completing import formalities in the buyer¶s country and provide ongoing contract with buyers. 8. Transactions should be of a minimum value of USD 250,000. 9. Forfaiting will accept only clean documentation in conformity with all regulations in the exporting/importing countries
Factoring service in India is of recent origin. It owes its genesis to the recommendations of the Kalyanasundaram Study Group appointed by the RBI in 1989. Pursuant to the acceptance of these recommendations, the RBI issued guidelines for factoring services in 1990. The first factoring company ± SBI Factors and Commercial Ltd (SBI FACS) started operation in April 1991. This article highlights the important aspects of the factoring services in India.
The main recommendations of the Committee/Group are listed as follows: (1) Taking all the relevant facts into account, there is sufficient scope for introduction factoring services in India which would be complementary to the services provided by banks. (2) The introduction of export factoring services would provide additional facility to exporters.
(3) While quantification of the demand for factoring services has not
been possible, it is assessed that it would grow sufficiently so as to make factoring business a commercially viable proposition within a period of two/three years. (4) On the export front, there would be a fairly good availment of various services offered by export factors. (5) With a view to attaining a balanced dispersal of risks, factors should offer their services to all industries and all sectors in the economy.
(6) The pricing of various services by factors would essentially depend upon the cost of funds. Factors should attempt a mix from among the various sources of funds to keep the cost of funds as low as possible, in any case not exceeding 13.5 percent per annum, so that a reasonable spread is available. (7) The RBI could consider allowing factoring organizations to raise funds from the Discount and Finance House of India Ltd, as also from other approved financial institutions, against their usance promissory notes covering receivables factored by them, on the liens of revised procedure under bills discounting scheme. (8) The price for financing services would be around 16 per cent per annum and the aggregate price for all other services may not exceed 2.5 percent to 3 percent of the debts services.
(9) In the beginning only select promoter institutions/groups of individuals with good track record in financial services and competent management should be permitted to meter into this new field. (10) Initially the organizations may be promoted on a zonal basis. (11) There are distinct advantages in the banks being associated with handling of factoring business. The subsidiaries or associates of banks are ideally suited for undertaking this business; initially, it would be desirable to have only four or five organizations which could be promoted either individually by the leading banks or jointly by a few major banks having a large network of branches.
(12) Factoring activities could perhaps be taken up by the Small Industries Development Bank of India, preferably in association with one or more commercial banks. (13) The business community should first be educated through bank branches about the nature and scope of these services and the benefits accruing there from. (14) Factors cannot extend their services efficiently, effectively and economically without the support of computers, as quick and dependable means of communication. Concurrent with consideration of various aspects relating to commencement of factoring operations the promoters should initiate measures for organizing network of computers /dedicated lines the branches/agents in different parts of the country for accounting follow up remittance and other activities involved in factoring business.
(15)The Central Government and RBI should initiate appropriate measures immediately for setting up specialized agencies for credit investigations; until such agencies become fully operative, factors may have to rely on such information about clients/customers as could be collected through banks or other sources. (16) Since the suppliers would be able to obtain financial services from both banks and factors, it is necessary to provide for proper linkage between banks and factoring organizations. (17) The factoring of Small Scale Industrial (SSI) units could to be mutually beneficial to both factors and SSI units and the factors should make every effort to orient their strategy to crystallize, the potential demand for this sector.
