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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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