factoring - pravin

8/4/2019 Factoring - Pravin

1/24

Presented by :

1. Pravin Gavali

2. Vickram Singh

MIT-MBA (Finance)


2/24

1. Recourse factoring: In recourse factoring, the factorpurchases trade debts and essentially renders collectionservice and maintains sales ledgers. But in case of default ornon payment by a trade debtor, the client refunds theamount to the factor. Hence it does not include bad debts

protection.

2. Non recourse factoring: Under this ,the factor s obligation tothe client becomes absolute due date of the invoice,irrespective of the payment made or not made by the tradedebtor. In the other words, if the trade debtor fails to makepayment, the factor cant recover this amount from the client.In recourse factoring the charges are high as they offer theclient protection against bad debts. The loss arising out ofirrecoverable receivables is borne by the factor.


3/24

3. Advance factoring: The factor pays a pre-specified portion,ranging b/w 75% to 90% of the factored receivables in advance,

the balance being paid upon collection on the guaranteedpayment date. A drawing limit as a pre-payment is madeavailable by the factor to the client as soon as the factored debtsare approved the invoices are accounted for. The client has topay interest on the advance/repayment b/w the date of suchpayment and the date of actual collection from the customer

/due guaranteed payment date of such payment and the date,determined on the basis of prevailing short term rate.

4. Bank participation factoring: An extension of advancefactoring is bank factoring under this a bank provides an

advance to the client to finance a part ,say 50% of the factorreserve that is factored debt less advance given by the factor.Assuming 75% advance by the factor and 50%advance by thebank the factor and the bank b/w them make a pre payment of87.5%of the debt and the client share is only 12.5%of theinvestment receivables.


4/24

5. Maturing factoring : The maturing factoring is alsoknown as Collection factoring. Under such arrangementsthe factor does not make a pre payment to the client. Thepayment is made either on the guaranteed payment dateor on the date of collection. The guaranteed payment dateis generally fixed taking into account the previous ledgerexpereince of the client and a period for slow collection

after the due date.

6. Notified & undisclosed factoring: In case of notifiedand undisclosed factoring the customer informed aboutthe assignment of the debt to the factoring agent and isalso asked to pay the dues to the factor instead of thefirm. On the other hand in undisclosed factoring thefactoring arrangement is not disclosed to the customer butthe customer is required to make the payment to thechanged address.


5/24

7. Full factoring : this is the most comprehensive form of

factoring combining the features of almost all thefactoring service , specially those of non recourse andadvance factoring. It is also known as Old line factoring. full factoring provides the entire spectrum of servicesnamely collection, credit protection, sales ledger

administration and short term finance.

8. Invoice factoring: strictly speaking this form offactoring is not considered as an integral part of the

present day factoring system because it does not carrythe service element of factoring. Under this type offactoring the debts due to the client are purchased bythe factor thus provides improved liquidity underwhich the supplier position becomes very comfortable.


6/24


7/24

1. Administration of sales ledger: the factormaintains the clients sales ledger. On transacting asales deal an invoice is sent by the client to thecustomer and a copy of the same is sent to thefactor. The ledger is generally maintained underthe open item method in which each receipt ismatched against the specific invoice. The

customers account clearly reflects the various openinvoices o/s on any given date. The factor alsogives periodic reports to the client on the currentstatus of receivables, receipts of payments from the

customers and other useful information.


8/24

2. Provision of collection facility: the factorundertakes to collect the receivables on behalf of

the client relieving him of the problems involvedin collection and enables him to concentrate onother important functional areas of business. Thisalso enables the client to reduce the cost ofcollection by way of savings in manpower, time

and efforts. The use of trained manpower withsophisticated infrastructural backup enables afactor to systematically follow up and make timelydemands on the debtors to make payments. Alsothe debtors are more responsive to9 the demandsfrom a factor being a credit institution. Collectionof receivables can be considered as the mostimportant function of a factor.


9/24

3. Financing trade debts: the unique feature of

factoring is that a factor purchases the bookdebts of his client at a price and the debts areassigned in favor of the factor who is willing togrant 85% of the assigned debts. The balance

15-20%is retained as a factor reserve. Where thedebts are factored with recourse the financeprovided would become refundable by theclient in case of non payment by the buyer .However where the debts are factored with

recourse the factors obligation to the sellerbecomes absolute on the due date of theinvoice whether or not the buyer makes apayment.


10/24

4. Credit control and credit protection: assumption ofcredit risk is one of the important functions of a factor.

This service is provided where the debts are factoredwithout recourse. The factor in consultation with theclient fixes credit limit for approved customers. Withinthese limits the factor undertakes to purchase all tradedebts of a customer without a recourse. In other wordsthe factor assumes the risk of default in payment by thecustomers. Arising from this function of the factorthere are two important incidental benefits accruing tothe client, first factoring relieves the client of thecollection work, secondly with access to extensiveinformation available on the financial standing and the

credit rating of the individual customers and theirtrack record of payments the factor is able to advise theclient on the credit worthiness of the potentialcustomer.


11/24

5. Advisory services: these services are spin

offs of the close relationship b/w a factor and aclient. By virtue of their specialized knowledgein finance and credit dealings and access toextensive credit information factors can

provide a variety of incidental advisoryservices to their clients such as:

A. customers perception of the clientsproducts, changes in marketing strategies.

B. audit of the procedures followed forinvoicing, delivery and dealing with salesreturn.


12/24

There are two types of factoring charges :

1. Finance Charge2. Service fee


13/24

1. Finance Charge :

Finance charge is computed on the

pre-payment O/s in the clients a/c at monthly intervals.Finance charges are only for financing that has beenavailed. This charges are similar to the interests levied ona cash credit facilities in a bank.

2. Service Fee :Service charge is a nominal charge levied

at monthly intervals to cover the cost of services likecollection, sales ledger mgmt., & periodical MIS reports.

Service fee is determined on the basis of criteria such asthe Gross sales values, the no. of customers, the no. ofinvoices & credit notes & the degree of credit riskrepresented by the customers or the transactions.


14/24

1. Upon entering into a factoring agreement, theclient agrees to serve a notice of assignment in theprescribed form to all customers, whose

receivables have been factored.2. The clients agrees to provide all copies of invoices,

challans, and other evidences relating to thefactored a/c & also remit payment received, if any,

by him against the factored invoices.3. The factor requires a power of attorney to assign

the debts and to draw negotiable instruments inrespect of such debts.

Legal Aspect Of Factoring


15/24

4. The legal status of the factor is that of an assignee.

5. In case of multiple finance ( i.e., part of book debtsare financed by bank and part by factoring), theletter of disclaimer is required by factor so thatthere is no duplicate charge & double financing isavoided.

6. Factoring transactions attract stamp duty to assign

all debts.

{ (law) a voluntary repudiation of a person's legalclaim to something }


16/24

The Mechanism of factoring can be explained with thehelp of the following diagram :

Client

Factor Customer

1Sendinvoice tocustomer

5

Paymentto factor

4Statementto customer

3

Paymentup to 80%2

Assigninvoice tofactor

6Balance 20%On realization

Process of Factoring


17/24

1. Customer places an order with the client for goods&/or service on credit; client delivers the goods &sends invoice to customers.

2. Client assigns invoice to factor.3. Factor makes pre-payment up to 80% & sends

periodical statements.

4. Monthly statement of accounts to customer &

follow-up.5. Customer makes payment to factor.

6. Factor makes balance 20% payment on realization

to the client.

Mechanism Of Factoring


18/24

1) Benefits to the Client

I. The clients credit sales are immediately converted

into ready cash as the factor makes a payment ofaround 80% of the factored invoices in advance. Thisproportion of finance is higher than the bank financeagainst credit sales.

II. The client can offer competitive credit terms to hisbuyers which, in turn, enable him to increase his sales& profits.

III. The cash realized from credit sales can be used toaccelerate the production cycle.


19/24

IV. The client is free from the tensions of monitoring hissales ledger and can concentrate on production,marketing, & other aspects. This results in a reduction

in overhead expenses & an increase in sales & profit.V. Factoring results in a close alteration among working

capital components of the business. Efficient mgmt. ofone component can have positive impact on other

components. For example, an increase in liquidityenables the firm to avail of discounts on purchases ofraw materials.

VI. The factor provides a comprehensive credit control

system by analyzing payment history. This helps inassessing the quality of the debtors & monitoring theirfinancial health.

VII. The client can expand his business by exploring new

markets.


20/24

2) Benefits to the Customers (Buyers):

I. Factoring facilitates the credit purchases of thecustomers as they get adequate credit period.

II. Customers save on bank charges & expenses.

III. The customer has not to furnish any documents. Hemerely to acknowledge the notification letter, thatis, an undertaking to make payment of the invoicesto the factor. Customers are furnished with

periodical statements of O/S invoices by the factor.IV. Factoring does not impinge on the customers

rights vis--vis the suppliers in respect of quality ofgoods, contractual obligations, & so on.


21/24

3. Benefits to Banks :

Factoring improves liquidityof the clients & thereby, improves the quality ofadvances of banks. Factoring is not a threat tobanking; it is a financial service complementary tothat of the banks.


22/24

1. Costlier :

Factoring could prove to be costlier to in-house mgmt. of receivables; especially for large firms

which have access to similar sources of funds as thefactors themselves and which on account of their sizehave well organized credit & receivable mgmt.

2. Deleterious Effect on the Creditworthiness :

Factoringis perceived as an expensive form of financing & also asfinance of the last resort. This tends to have adeleterious effect on the creditworthiness of the

company in the market.


23/24

3. Credit Limits on Trade :

The factor will want to setcredit limits for customers which may affect the way onetrades.

4. Difficult to Exit the Agreement :

Ending a factoringarrangement can be difficult where the only exit route is torepurchase the sales ledger or to switch factors & thatcould cause a sudden shortfall in ones working capital.

5. Reliance on Factor :

In the case of factoring, one isreliant on the factor to collect the debt in a timely &efficient manner.


24/24

Factoring transactions in India are governed bythe following Acts:-

a) Indian Contract Act, 1872

b) Sale of Goods Act, 1930

c) Transfer of Property Act,

d) Banking Regulation Act, 1949

e) Foreign Exchange Regulation Act, 1977.

factoring - pravin

Documents