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This depicts the factoring arrangement and it's difference between bills of exchange.
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FACTORING
Dr. Sarbesh MishraNICMAR, Hyderabad.
9/9/2009 Dr Sarbesh Mishra
Backdrop
o Working capital gets tied up in the form oftrade debts.
o The average collection period has been onincrease.
o Delays in collection results in liquidityproblems and consequently to delay inproduction and supplies.
o Increases the cost of capital, reduces profitand competitiveness of a company.
9/9/2009 Dr Sarbesh Mishra
Factor - Meaning
o Factor means “to make or to do” in otherwords ‘to get things done’.
o Dictionary meaning of Factor means ‘anagent’, engaged in financing the operationsof certain companies, through the purchaseof account receivables.
9/9/2009 Dr Sarbesh Mishra
Definition
o Factoring is an continuous arrangementbetween financial institution, (namely thefactor) and a company (namely client)which sells goods and services to tradecustomers on credit.
o Factoring is a service of financial natureinvolving the conversion of credit bills intocash.
9/9/2009 Dr Sarbesh Mishra
Modus Operandi
o A factoring arrangement (invoicepurchasing arrangement) between clientand the factor, which is the financingorganisation.
o Selling of goods by client results inpreparation of invoices
o Goods are sent to the buyers withoutraising the B/E but by invoice.
9/9/2009 Dr Sarbesh Mishra
Contd….
o The trade debt due by the purchaser to theclient is assigned to the factor.
o Purchaser is required to pay to the factor.o Client hands over the invoices to the factor
under cover of a schedule of offer along withcopies of invoices.
o Factor makes an immediate up to 80% of theassigned invoices and balance to be paid onrealisation of the debt.
9/9/2009 Dr Sarbesh Mishra
Terms and Conditions
o Assignment of debt in favor of factoro Selling limits for the cliento Conditions within which the factor will
have recourse to the client in case of non-payment by trade customer
o Details regarding the payment to the factorfor his services
o Limit of any overdraft facility and the rateof interest to be charged by the factor
9/9/2009 Dr Sarbesh Mishra
Functions
o Purchase and collection of debts
o Sales ledger management
o Credit investigation and undertaking ofcredit risk
o Provision of finance against debts
o Rendering consultancy services
9/9/2009 Dr Sarbesh Mishra
Types of Factoring
o Non Recourse Factoring
o Recourse Factoring
o Maturity Factoring
o Bulk Factoring
o Invoice Factoring
o Agency Factoring
o International Factoring
9/9/2009 Dr Sarbesh Mishra
Factoring Vs. DiscountingI. Covers entire trade debts
II. This is outright purchase oftrade debts
III. Non-recourse factoring isalso available
IV. It includes severalspecialized operations
V. No such registration isrequired
I. Only those trade debtsbacked by accountreceivable.
II. Kind of advance against thebills
III. Discounting is always withrecourse
IV. It is only for provision offinance
V. Discounting requiresregistration charges withRoC.
