FactoringFactoring

MeaningMeaning

Factoring may broadly be defined as the relationship, created by an agreement, between the seller of goods /services and a financial institution called the factor, whereby the latter purchases the receivables of the former and also controls and administers the receivables of the former.

Mechanism of FactoringMechanism of Factoring1. An agreement is entered into between

the selling firm and the factor firm. 2. The sales documents should contain

the instructions to make payments directly to the factor who is assigned the job of collection of receivables.

3. When the payment is received by the factor, the account of the selling firm is credited by the factor after deducting the fees, charges, interest, etc

4. The factor may provide advance finance to the selling firm if the conditions of the agreement so require.

FactorSelling FirmCustomer Receivabl

es

Agreement(1)

Payments

Sale of Goods(2)

Invoice Copy(3)

Advance Payment /Discounting(4)

Final Payment after deducting fess and charges If any (5)

Types of FactoringTypes of FactoringRecourse Factoring and Non

Recourse FactoringAdvance and Mature FactoringConventional or Full FactoringDomestic and Export FactoringLimited FactoringSelected Seller Based FactoringDisclosed and Undisclosed

Factoring

Functions of Sales LedgerFunctions of Sales LedgerAdministration of Sales LedgerCollection of receivablesProvision of FinanceProtection Against RiskAdvisory Services

Advantages of FactoringAdvantages of FactoringImprove his efficiencyImproving his Credit Standing PositionProvides Flexibility to the CompanyImproved Cash FlowsMeet Seasonal DemandsBetter Purchase PlanningHelp in Boosting the efficiency ratiosSaves the management time and

effortAvoid Bad DebtsEnsures better management of

receivables

ForfaitingForfaitingThe forfaiting has derived from a french

term “a forfait” which means to forfeit(or surrender) one’s rights on something to some one else. Forfaiting is a mechanism of financing exports:

By discounting export receivablesEvidenced by bills of exchanges or

promissory notesWithout recourse to the seller(exporter)Carrying medium to long term maturitiesOn a fixed rate basis upto 100% of the

contract value.

Mechanism of ForfaitingMechanism of Forfaiting The exporter and importer negotiate the proposed

export sale contract. The forfaiter collects details about the importer,

supply and credit terms, etc Forfaiter ascertains the country risk and credit risk

involved. The forfaiter quotes the discount rate The exporter then quotes a cobtract price to the

overseas buyer loading discount rate, commitment fee on the sale price of the goods to be exported.

The exporter and forfaiter sign a contract Export takes place against documents guranteed by

the importer bank The exporter discounts the bills with the forfaiter

and the latter presents the same to the importer for payment on due date on even sell it in secondary market

BenefitsBenefits It frees the exporter from political or

commercial risks from abroad.Forfaiting offers without recourse finance

to an exporter. It does not effect the exporter’s borrowing limits/capacity

It relieves the exporter from botheration of credit administration and collection problems

It is specific to a transaction. It does not require long term banking relationship with forfaiter

Exporter saves money on insurance costs because forfaiting eliminates the need for export credit insurance.