Factoring
Content
Factoring
1. Concept of factoring 2. Numerical problem on recourse and non-recourse factoring. 3. Features of factoring 3. Types of factoring 5. Characteristic of factoring in India
Features of Factoring
• A new avenue of finance • specialize in financing receivables
• Short term financing
• Saves opportunity cost
MECHANICS OF FACTORING
• Customer places an order with seller (the client) • Factor and the seller enter into a factoring agreement about various terms of factoring • Sale contract is entered into with buyer and the goods are delivered. The invoice with the notice to pay the factor is sent along with.
MECHANICS OF FACTORING
• The copy of invoice covering the above sale is to the factor, who maintains the sales ledger. • The factor prepays 80% of the invoice value • Monthly statements are sent by the factor to the buyer. If there are any unpaid invoices, follow up action is intimated.
MECHANICS OF FACTORING
• The buyer settles the invoices on expiry of credit period is allowed. • The balance 20% less the cost of factoring is paid by the factor to the client.
NON-RECOURSE FACTORING
• In non-recourse factoring, the factor has no recourse to the firm in the event of a customer defaulting on payments. It assumes the risk of bad debts. The factor retains the right recourse, if the customer fails to pay for any reason other than financial distress.
• The bad debts are borne by the factor.
RECOURSE FACTORING
• In recourse factoring, the firm bears the credit risk inherent in the receivables assigned to the factor. • The client will carry the credit risk in respect of debts sold to the factor
ADVANCE FACTORING
• Factor provides an advance against the uncontrolled and ‘not due’ receivables of a firm.
MATURE FACTORING
• The factor does not make any advance payment to the client. The whole payment is made on the date of collection or on the guaranteed payment date.
FULL FACTORING
• Full factoring is a merger of non-recourse and advance factoring. • Full factoring incorporates a range of services that include collection, credit protection, sales-ledger administration and short-term finance.
SUPPLIER GUARANTEE FACTORING
• This type of factoring involves a factor to approve extending of credit by an importer/distributor to a customer. • The distributor, after receiving credit approval from the factor, makes arrangements for shipping the goods directly to the customer. • The factor follows the customer, collects the due amount, and after deducting his commission, makes a final payment to the distributor.
NOTIFIED FACTORING
• Customer is intimated about the assignment of debt to a factor and also directed to make payments to the factor instead of to the firm
BANK PARTICIPATION FACTORING
• a commercial bank provides an advance to the client against receivables deposited by him with the factor..
INTERNATIONAL FACTORING
• Cross-border factoring involves four parties in the transaction- an exporter, an export factor, an import factor and an importer. • The exporter enters into an agreement with the export factor in his country and assigns him export receivables as and when they arise. Payments against factored debts are made in a similar fashion to that of domestic factoring. • The export factor enters into an agreement with the factor in the country in which the import factor resides and enters into a contract with him assigning him the tasks of credit checking, sales ledgering and collection, for payment of a stipulated fee.
Characteristics of factoring in India(Class 8)
• • • • • • • • • Short term financing -90 to 150 Costly-1.5% to 3% per month Opportunity to leverage finance Generally recourse factoring Factoring companies usually carry out credit risk analysis before entering into the agreement. Off balance sheet financing For delayed payments beyond the approved credit period, penal charge of around 1-2% per month Factoring cost vary according to the transaction size, financial strength of the customer Subsidiaries of four Indian banks-SBI Factors and Commercial Services , CAN Bank Financial Services , PNB and Allahabad Bank were set up to function on zonal basis.
1. Concept of factoring 2. Numerical problem on recourse and non-recourse factoring. 3. Features of factoring 3. Types of factoring 5. Characteristic of factoring in India
Features of Factoring
• A new avenue of finance • specialize in financing receivables
• Short term financing
• Saves opportunity cost
MECHANICS OF FACTORING
• Customer places an order with seller (the client) • Factor and the seller enter into a factoring agreement about various terms of factoring • Sale contract is entered into with buyer and the goods are delivered. The invoice with the notice to pay the factor is sent along with.
MECHANICS OF FACTORING
• The copy of invoice covering the above sale is to the factor, who maintains the sales ledger. • The factor prepays 80% of the invoice value • Monthly statements are sent by the factor to the buyer. If there are any unpaid invoices, follow up action is intimated.
MECHANICS OF FACTORING
• The buyer settles the invoices on expiry of credit period is allowed. • The balance 20% less the cost of factoring is paid by the factor to the client.
NON-RECOURSE FACTORING
• In non-recourse factoring, the factor has no recourse to the firm in the event of a customer defaulting on payments. It assumes the risk of bad debts. The factor retains the right recourse, if the customer fails to pay for any reason other than financial distress.
• The bad debts are borne by the factor.
RECOURSE FACTORING
• In recourse factoring, the firm bears the credit risk inherent in the receivables assigned to the factor. • The client will carry the credit risk in respect of debts sold to the factor
ADVANCE FACTORING
• Factor provides an advance against the uncontrolled and ‘not due’ receivables of a firm.
MATURE FACTORING
• The factor does not make any advance payment to the client. The whole payment is made on the date of collection or on the guaranteed payment date.
FULL FACTORING
• Full factoring is a merger of non-recourse and advance factoring. • Full factoring incorporates a range of services that include collection, credit protection, sales-ledger administration and short-term finance.
SUPPLIER GUARANTEE FACTORING
• This type of factoring involves a factor to approve extending of credit by an importer/distributor to a customer. • The distributor, after receiving credit approval from the factor, makes arrangements for shipping the goods directly to the customer. • The factor follows the customer, collects the due amount, and after deducting his commission, makes a final payment to the distributor.
NOTIFIED FACTORING
• Customer is intimated about the assignment of debt to a factor and also directed to make payments to the factor instead of to the firm
BANK PARTICIPATION FACTORING
• a commercial bank provides an advance to the client against receivables deposited by him with the factor..
INTERNATIONAL FACTORING
• Cross-border factoring involves four parties in the transaction- an exporter, an export factor, an import factor and an importer. • The exporter enters into an agreement with the export factor in his country and assigns him export receivables as and when they arise. Payments against factored debts are made in a similar fashion to that of domestic factoring. • The export factor enters into an agreement with the factor in the country in which the import factor resides and enters into a contract with him assigning him the tasks of credit checking, sales ledgering and collection, for payment of a stipulated fee.
Characteristics of factoring in India(Class 8)
• • • • • • • • • Short term financing -90 to 150 Costly-1.5% to 3% per month Opportunity to leverage finance Generally recourse factoring Factoring companies usually carry out credit risk analysis before entering into the agreement. Off balance sheet financing For delayed payments beyond the approved credit period, penal charge of around 1-2% per month Factoring cost vary according to the transaction size, financial strength of the customer Subsidiaries of four Indian banks-SBI Factors and Commercial Services , CAN Bank Financial Services , PNB and Allahabad Bank were set up to function on zonal basis.
