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PRESENTED BY-

VINEETA

DHANWANI

&

PRIYA SAHNI

Presented to :-T.D SINGH

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Factoring is a financial transaction whereby a business

sells its accounts receivable

(i.e., invoices) to a third party (called a factor) ata discount in exchange for immediate money with which

to finance continued business.

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A study group appointed

INTERNATIONAL INSTITUTE for the Unification ofPrivate Law (UNIDROIT) ROME 1988 defines:-

factoring means an arrangement between a factor and

his client which includes at least two of the followingservices to be provided by the factor-

1) Finance

2) Maintenance of accounts

3) Collection of debts4) Protection against credit risk

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Factoring is used by a firm when the available

Cash Balance held by the firm is insufficient to

meet current obligations and accommodate its

other cash needs, such as new orders or

contracts.

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For Smooth cash flow

For meeting working capital

needs

Overcome the situation from

high cost of capital and reducedprofit

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Client customer

factor

Buyer

collectio

n

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a) Follow-up and collection ofReceivables from Clients.

b) Purchase of Receivables withor without recourse.

c) Help in getting informationand credit line on customers(credit protection)

d) Sorting out disputes , due to

his relationship with Buyer &Seller.

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It is purchasing & collection theclients a/cs receivables (with orwithout recourse),

Sales Ledger management

Credit investigation & undertakingof risks

Provision of finance against debts

Rendering consultancy services

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Client Customer

Factor

Order placed

Deliver of goods

Client submits invoice

Factor-Prepayment

Monthly statements

Customer pays

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Fax the copy of invoice to factor

Factor processes the invoice

Get up to 80% of the invoice in 24 hours

20% kept in reserve account

Factor receives the payment from customer

Factor deducts fee from reserve account

Factor forwards the balance from reserve

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a) Recourse Factoring.

b) Non-recourse Factoring.

c) Maturity Factoring.

d) Cross-border Factoring.

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a) Up to 75 % to 85 % of the Invoice

Receivable is factored.

b) Interest is charged from the date of

advance to the date of collection.c) Factor purchases Receivables on the

condition that loss arising on account ofnon-recovery will be borne by the Client.

d) Credit Risk is with the Client.e) Factor does not participate in the credit

sanction process.

f) In India, factoring is done with recourse.

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Financial Services

Collection Service

Credit Risk Service

Provision of expertise sales ledgermanagement service

Consultancy service

Economy in Servicing

Off-balance sheet financing Trade Benefits

Miscellaneous service

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a) Factor purchases Receivables on the condition that theFactor has no recourse to the Client, if the debt turns outto be non-recoverable.

b) Credit risk is with the Factor.

c) Higher commission is charged.

d) Factor participates in credit sanction process andapproves credit limit given by the Client to the Customer.

e) In USA/UK, factoring is commonly done withoutrecourse.

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a) Factor does not make any advance payment to the

Client.

b) Pays on guaranteed payment date or on collection

of Receivables.c) Guaranteed payment date is usually fixed taking

into account previous collection experience of the

Client.

d) Nominal Commission is charged.e) No risk to Factor.

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a) It is similar to domestic factoring except that there

are four parties, viz.,

b) a) Exporter,

c) b) Export Factor,d) c) Import Factor, and

e) d) Importer.

f) It is also called two-factor system of factoring.

g) Exporter (Client) enters into factoring

arrangement with Export Factor in his country and

assigns to him export receivables.

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It may reduce the scope for other borrowing -

book debts will not be available as security.

Factors will restrict funding against poor quality

debtors or poor debtor spread, so you will needto manage these funding fluctuations.

It may be difficult to end an arrangement with a

factor as you will have to pay off any money

they have advanced you on invoices if thecustomer has not paid them yet.

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Some customers may prefer to deal directly with

you.

The cost will mean a reduction in your profit

margin on each order or service fulfillment.How the factor deals with your customers will

affect what your customers think of you.

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a) Transportation

b) Medical

c) Janitorial(the maintenance or cleaning of a

building)d) Staffing

e) Construction

f) Manufacturing

g) Service

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a) Banks reluctance to provide factoring services

b) Banks resistance to issue Letter of Disclaimer

(Letter of Disclaimer is mandatory as per RBI

Guidelines).c) Problems in recovery.

d) Factoring requires assignment of debt which

attracts Stamp Duty.

e) Cost of transaction becomes high.

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Financial Services

Collection Service

Credit Risk Service

Provision of expertise sales ledgermanagement service

Consultancy service

Economy in Servicing

Off-balance sheet financing Trade Benefits

Miscellaneous service

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