07 Factoring and ing

8/7/2019 07 Factoring and ing

http://slidepdf.com/reader/full/07-factoring-and-ing 1/21

Factoring & Forfaiting

Junior level presentation

Compiled by V.V.S. Rao



Factoring



Factoring

Factoring means undertaking to finance andcollect

account Receivables

Can be in domestic or international trade

Usually undertaken by a Bank or a Financial

Institution

The buyer and seller usually have long termrelationship

Factoring enables the companies to sell their

outstanding book debts for cash

Introduction



Factoring

Process It is an ongoing arrangement between a ´Sellerµ (Customer

of "Factor") and ´Factorµ (the banker)

Sales invoices will be raised on ´Open Accountµ basis on the

Buyers by the Sellers.

These invoices are regularly assigned by Sellers (Customersof ´Factorµ) to the ´Factorµ

The ´Factorµ will undertake:

Financing

Collection

Sales Ledger Administration

The ´Seller ´ assigns his right of recovery on the invoices to

the ´Factorµ at a discount to raise short term working capital

finance

The ³Factor´ may or may not accept the underlying



Factoring Types of factoring

There are two types of factoring:

i. Recourse factoring (with recourse)

ii. Non-Recourse factoring (without recourse)

Recourse factoring:

The Factor has got the right to recover the amount advanced from

the Seller (Client of "Factor") in case of non-payment of the invoice

by the buyer.

Non-Recourse factoring:

In case of non-payment, the ´Factorµ will bear the risk of bad debts

This means the ´Factorµ provides to the client the both finance and

credit protection



FactoringOperation

The ´Factorµ operates by buying from the sellingcompany, their invoiced debts.

These are purchased usually with credit

protection by the ´Factorµ

The ´Factorµ is responsible for:

Credit control

Collection Sales accounting work

Thus management of the company can

concentrate on production and sales



FactoringOperation

Various MIS reports such as will be provided by the´Factorµ to the seller:

Debtors ageing analysis

Weekly statement of accounts

Sales analysis Statement of outstanding invoices

Usually before providing advance payments to the

supplier; an agreement is entered with the supplier for

assigning the debts

Sub-limits for each purchaser could be fixed by the

´Factorµ

´Factorµ will register their right of assignment with



Factoring Advantages of Factoring

Factoring replaces high cost market credit and enablespurchases on cash basis for availing cash discounts

The seller gets instant finance against invoices

Low margin (normally 20%) which will improve cash flowof seller

Seller gets large credit / grace period

Each invoice is followed-up for payment by the ´Factorµ tillpayment is made by the due date and even thereafter.

MIS reports and Ledger administration is taken care by

the ´Factorµ

´ µ



FACTORING

VS

BILLS DISCOUNTING

BILL DISCOUNTING

1. Bill is separately examinedand discounted.

2. Financial Institution doesnot have responsibility ofSales LedgerAdministration andcollection of Debts.

3. No notice of assignmentprovided to customers ofthe Client.

FACTORING

1. Pre-payment made againstall unpaid and not dueinvoices purchased byFactor.

2. Factor has responsibilityof Sales LedgerAdministration andcollection of Debts.

3. Notice of assignment isprovided to customers ofthe Client.



VS

BILLS DISCOUNTING (CONTD«)

BILLS DISCOUNTING

4. Bills discounting is usually

done with recourse.

5. Financial Institution can get

the bills re-discountedbefore they mature forpayment.

FACTORING

4. Factoring can be donewithout or without recourseto client. In India, it is donewith recourse.

5. Factor cannot re-discount

the receivable purchasedunder advanced factoringarrangement.



Forfaiting



ForfaitingDefinition

Forfaiting is a means of finance (credit)

which an exporter of goods avails

from an intermediary called the ´Forfaiterµ

against the export receivables

without the obligation to repay the credit



ForfaitingPurpose

Forfaiting is used in International trade transactions

It is nothing but discounting of trade receivables such

as:

Drafts drawn under Letters of Credit Bills of Exchange

Promissory Notes

Any other freely negotiable instruments

Forfaiting is done on ³No Recourse´ basis

i.e. In case if importer / drawee fails to make payment

on the due date the ³Forfaiter´ can not claim from the

exporter refund of the credit provided



ForfaitingOperation

Exporter can grant attractive credit terms to foreignbuyers, without sacrificing his own cash flows.

Exporter is free of the risks of possible late payment

or default by the buyer (Importer)

Exporter is fully protected against volatility in

interest rates and exchange rates.

The above is possible since all these risks are passedon to the Forfaiter

Forfaiting is a highly effective sales tool, which

simultaneously improves cash flow and eliminates

risk for the exporter



Forfaiting Mechanism of Forfaiting

Exporter enters into contract with Importer

Adequate credit to pay the bills is given by

exporter

Exporter will inform Importer that he willbe assigning the bills to Forfaiter

Importer will arrange with his banker forissue of Letter of credit in favour of exporter

Exporter enter into Forfaiting contract with

ForfaiterContd in Next Slide)



Forfaiting Mechanism of Forfaiting («..contd)

Actual export takes place

Bill of exchange is drawn by the Exporter

(Seller)

Such Bill of exchange will be accepted bythe LC Issuing Bank in case of LC bills orby the Bankers of the Importer in othercases.

Forfaiter sends these documents to theImporter·s Bank , which in turn notifiesthe receipt to Forfaiter

Forfaiter makes payment of 100% of billvalue to the Exporter after deductingdiscount and other incidental chargesContd in Next Slide)



Forfaiting Mechanism of Forfaiting («..contd)

Forfaiter in exchange of payment hemade to the Exporter, takes over theresponsibility for claiming the debtamount from the Importer

Forfaiter either holds the bill of exchange till maturity (as investment)or sells them to another investor on anon-recourse basis

The holder of the Bills of exchangethen presents each receivable to theBank at which they are payable on

respective due dates.



Forfaiting Advantages of Forfaiting

Finance tothe extent of

100% of invoicevalue

Exporter is

free fromanyresponsibilit

y i.e. non-recourse

basisfinancing

Exporter¶slines of

credit with his banker

become free

Improvescash flow of

the exporter

Savesadministrati

on costs

Increasestrade

opportunity

Exporter

avoidsvarious riskslike interest-

rate risk,currency

risk, creditrisk and

political risk



FACTORING VS. FORFAITING

POINTS OFDIFFERENCE

FACTORING FORFAITING

Extent of Finance Usually 75 ² 80% of thevalue of the invoice

100% of Invoice value

CreditWorthiness

Factor does the creditrating in case of non-recourse factoringtransaction

The Forfaiting Bankrelies on thecreditability of theAvalling Bank.

Services provided Day-to-day administration

of sales and other alliedservices

No services are

provided

Recourse With or without recourse Always withoutrecourse

Sales By Turnover By Bills



COMPARATIVE ANALYSIS

BILLSDISCOUNTED

FACTORING FORFAITING

1. Scrutiny Individual SaleTransaction

Service of SaleTransaction

Individual SaleTransaction

2. Extent ofFinance Upto 75 ² 80% Upto 80% Upto 100%

3. Recourse With Recourse With orWithoutRecourse

WithoutRecourse

4. SalesAdministration

Not Done Done Not Done

5. Term Short Term Short Term Medium Term

6. ChargeCreation

Hypothecation Assignment Assignment



Forfaiting

Documents

07 Factoring and ing