Factoring Or Receivable Financing

SANJAY MEHROTRA ACA,MBA

What is Factoring?

Parties Involved
Buyers of the goods(i.e. Customers) Sellers of the goods(i.e. Client) Factor

Process
Customer
credit sale of goods

Client

Invoice
Pays the balance amount

Pays the amount (In recourse type customer pays through client)

Submit invoice copy

Factor

Payment up to 80% initially

Function of Factor To provide Finance against book debts

Collect cash against Receivables on due date Provide protection to clients provide Information to clients

Types of Factoring
Full service factoring Resource factoring Maturity factoring Invoice factoring Agency factoring

Advantages of Factoring
Client receives immediate cash against cash Reduces administrative cost and time Eliminate losses on bad debt Client can avail advisory services from factor

Disadvantages
Image of client may suffer some customer may prefer to deal directly have to pay extra to remove liability

Cost of Factoring
Two types of costs in factoring services:1. Service Fee or Charges 2. Discount Charges

EXPORT FACTORING

offered to the exporters (clients) who sell their products or services to the importers (customers) in other countries on open account terms having a credit period ranging from 60 to 180 days.

Four different types of arrangements are possible for export factoring :

a) Two Factor System b) Single (Direct) Factoring System c) Direct Export Factoring d) Direct Import Factoring

Precautions to be taken by the Export Factor

Moblise Funds at the most affordable cost Factor must be in a position to absorb credit risk. Follow uniform rules to operate in international markets.

RBI Guidelines for banks to undertake factoring services

frame an appropriate policy should be undertaken by selected branches of banks should be treated as par to loan maintain a balanced portfolio of finance receivable vis--vis credit portfolio

Case Study
Credit Sales =80 Lakhs Average Collection Period =80 days Bad debt losses=1% of credit sales Cost of Administrating Credit Sales=Rs 120000 p.a Factors Commission= 2% Factor Pay Advance at an interest rate of 18% With holding 10% as reserve.

SOLUTION