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Factoring
Factoring
Submitted by:-
Mrs K.K.Acharya Reeturani Bohidar
Sr.Finance Faculty MBA 6th Trimester
Roll no.-B/07/02
FACTORING
INTRODUCTION
1. Usually the period for factoring is 90 to 150 days. Some factoring companies
allow even more than 150 days.
2. Factoring is considered to be a costly source of finance compared to other
sources of short term borrowings.
5. Credit rating is not mandatory. But the factoring companies usually carry out
credit risk analysis before entering into the agreement.
9. For delayed payments beyond the approved credit period, penal charge of
around 1-2% per month over and above the normal cost is charged (it varies
like 1% for the first month and 2% afterwards).
MECHANISM
A factor provides finance to his client upto a certain percentage of the
unpaid invoices which represent the sales of goods or services to approved
customers. The mechanism of the factoring scheme is as follows:
There should be a factoring arrangement (invoice purchasing arrangement)
between the client(which sells the goods and services to trade customer in
credit) and the factor, which is the financing organization.
Whenever the client sells goods to the trade customers on credit he prepares
invoices in the usual way.
The goods are sent to the buyers without raising a bill of exchange but
accompanied by an invoice.
The debt due by the purchaser to the client is assigned to the factor by
advising the trade customers to pay the amount due to the client, to the
factor.
The client hands over the invoices to the factor under cover of a schedule of
offer along with the copies of invoices and receipted delivery challans.
The factor makes an immediate payment upto 80% of the assigned invoices
and the balance 20% will be paid on realization of the debt.
credit sale of
goods
Customer Client
Invoice
Pays the
Pays the amount (In recourse balance
type customer pays through amount Submit invoice
client) copy
Payment up to
80% initially
Factor
TYPES OF FACTORING
The opinion of the chief Marketing manager is that in context of the factoring
arrangement his staff would be able to exclusively focus on sales promotion which
would result on additional sales of Rs 75 crore.
CONCLUSION
Factoring is a money market instrument.
Since, factoring is not a negotiable instrument, customer’s consent is
required about the factoring arrangement under which he will make a
repayment directly to the factor but not to the client.
As a result of factoring services, the enterprise can concentrate on
manufacturing and selling.
The risk of bad debts is eliminated.
The factoring institution also provides advice on business trends and other
related matters.