The History of Factoring

Have you ever wondered about the history of factoring? You may be surprised just how far back
in history factoring goes. In this article we will review the history of factoring as well as the pros
and cons of factoring.

Almost since the dawn of civilization, there has been factoring. Factoring is a way of advancing
funds for expected payment. In the earliest times of civilization, 4,000 years ago, the
Mesopotamians used factoring in their business dealings. However, factoring was not terribly
regular. The ancient Romans used a form of factoring by selling promissory notes on a secondary
market at a discount.

Factoring gained true popularity, however, in trade between the American colonists and their
European buyers. Prior to the American Revolution, merchants in the colonies sent raw
materials, from timber to wool to cotton to furs, to British and European merchants. However,
sending the goods such long distances could get expensive. And in the meanwhile, waiting for
payment to come back across the Atlantic from Britain and Europe could cause delays in being
able to do what was necessary to harvest and plant and process new orders.

In order to get around these problems, the British and European merchants paid the colonists in
part for the materials. This way, the colonists had an advance with which to continue their
operations. These eased cash flow and created a streamlined process for ensuring that trade
continued unabated.

As society progressed after the American Revolution, and as the Industrial Revolution came, the
focus of factoring changed. Credit became more important to factoring. The credit of the
company itself was not as important as the credit of its clients. Indeed, in many cases, factors
helped companies figure out which of its customers were the most credit worthy. This way,
factors could also help companies keep their cash flow moving. They advanced companies
capital based on what was owed them by their credit worthy customers.

Before the 1930s, the most popular industries for factoring were the garment and textile
industries. These are industries that rely on raw materials. In order to make sure that companies
could continue to buy raw materials to produce clothing and textiles, factoring was used.
However, it soon became evident, after World War II, that factoring could work effectively for
any business that invoiced others.

During the 1960s, 1970s and 1980s, interest rates were on the rise and banks were increasingly
regulated. This made it difficult for companies to get traditional financing. Factoring became
even more popular, since it did not require the same sort of credit checks. Additionally, since the
invoices were bought – minus a fee – it was possible to avoid the same sort of interest charges.
Small business, startups and rapidly growing businesses benefitted especially from this increase
in factoring. Factoring grew as a service as businesspeople found their options contracting.
Today, factoring remains a viable alternative to more traditional financing. Thousands of
businesses sell their accounts receivable to factors every year – amounting to an industry
representing billions of dollars. And nearly any business with reliable customers and an
invoicing system can take advantage of factoring

Factoring in India
What is factoring?

Factoring is a financial option for the management of receivables. In simple definition it is the
conversion of credit sales into cash. In factoring, a financial institution (factor) buys the accounts
receivable of a company (Client) and pays up to 80%(rarely up to 90%) of the amount
immediately on agreement. Factoring company pays the remaining amount (Balance 20%-
finance cost-operating cost) to the client when the customer pays the debt. Collection of debt
from the customer is done either by the factor or the client depending upon the type of factoring.
We will see different types of factoring in this article. The account receivable in factoring can
either be for a product or service. Examples are factoring against goods purchased, factoring for
construction services (usually for government contracts where the government body is capable of
paying back the debt in the stipulated period of factoring. Contractors submit  invoices to get
cash instantly), factoring against medical insurance etc. Let us see how factoring is done against
an invoice of goods purchased.
Characteristics of factoring

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.
3. Factoring receivables is an ideal financial solution for new and emerging firms without
strong financials. This is because credit worthiness is evaluated based on the financial
strength of the customer (debtor). Hence these companies can leverage on the financial
strength of their customers.
4. Bad debts will not be considered for factoring.
5. Credit rating is not mandatory. But the factoring companies usually carry out credit risk
analysis before entering into the agreement.
6. Factoring is a method of off balance sheet financing.
7. Cost of factoring=finance cost + operating cost. Factoring cost vary according to the
transaction size, financial strength of the customer etc. The cost of factoring vary from
1.5% to 3% per month depending upon the financial strength of the client's customer.
8. Indian firms offer factoring for invoices as low as 1000Rs
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).

Different types of Factoring

1. Disclosed and Undisclosed

2. Recourse and Non recourse

A single factoring company may not offer all these services.

Disclosed

In disclosed factoring client's customers are notified of the factoring agreement. Disclosed type
can either be recourse or non recourse.

Undisclosed

In undisclosed factoring, client's customers are not notified of the factoring arrangement. Sales
ledger administration and collection of debts are undertaken by the client himself. Client has to
pay the amount to the factor irrespective of whether customer has paid or not. But in disclosed
type factor may or may not be responsible for the collection of debts depending on  whether it is
recourse or non recourse.

Recourse factoring

In recourse factoring, client undertakes to collect the debts from the customer. If the customer
don't pay the amount on maturity, factor will recover the amount from the client. This is the most
common type of factoring. Recourse factoring is offered at a lower interest rate since the risk by
the factor is low. Balance amount is paid to client when the customer pays the factor.

Non recourse factoring

In non recourse factoring, factor undertakes to collect the debts from the customer. Balance
amount is paid to client at the end of the credit period or when the customer pays the factor
whichever comes first. The advantage of non recourse factoring is that continuous factoring will
eliminate the need for credit and collection departments in the organization

Recourse v. Non-Recourse Factoring

When factoring invoices, there are typically two types of accounts receivable factoring offered
by factors - recourse and non-recourse factoring. Factoring with recourse is where the client
selling the invoice is required to buy the invoice back from the factor if it goes uncollected for a
fixed number of days, thus sharing the risk between the client and the factor. Factoring without
recourse is where the client sells the invoice to the factor and the factor bears all the risk for
collection of the invoice. Both options have pros and cons that need to be weighed in your
decision as you decide which type of factoring arrangement to go with.

Factoring with recourse is generally more common in most industries because the client selling
the invoice shares the risk with the factor.  Factoring with recourse is generally a less expensive
form of factoring because the factor bears less risk.  Additionally,  if your business rarely writes
off bad receivables, factoring with recourse may be your best bet because you can be confident
that you will collect on the invoice and save money on factoring fees.  The down side is you may
have to buy back an invoice if you or the factor are unable to collect the invoice in the specified
time outlined in your factoring agreement.

Factoring without recourse is a good option when the collectibility of your invoices is uncertain
or you just don't want to share in the risk of collection.  Non-recourse factoring is common in
certain industries, such as transportation, but is generally less common throughout most
industries.  Moreover, non-recourse factoring will incur slightly higher fees than factoring with
recourse.

Regardless of the option you choose for factoring, be sure to weigh the pros and cons of each
type of factoring.  And remember, the more risk you are willing to take generally decreases the
amount of factoring fees you will pay.

Factoring companies in India

Canbank Factors Limited: http://www.canbankfactors.com
SBI Factors and Commercial Services Pvt. Ltd: http://www.sbifactors.com

The Hongkong and Shanghai Banking Corporation Ltd: http://www.hsbc.co.in/1/2/corporate/trade-and-

factoring-services

Foremost Factors Limited: http://www.foremostfactors.net

Global Trade Finance Limited: http://www.gtfindia.com

Export Credit Guarantee Corporation of India Ltd:

https://www.ecgc.in/Portal/productnservices/maturity/mfactoring.asp

Citibank NA, India: http://www.citibank.co.in

Small Industries Development Bank of India (SIDBI): http://www.sidbi.in/fac.asp

Standard Chartered Bank: www.standardchartered.co.in

About Sbi Factors

 
SBI Factors, a subsidiary of State Bank Of India, is one of the leading factoring companies
in India with an asset base of Rs 1908.00 crores as on March 31, 2008. It is the first
factoring company to be set up in India.

It was incorporated in February 1991 and commenced business operations from April 1991.
State Bank of India and its 2 associate banks have a 70% stake in SBI Factors while 20% is
held by Small Industries Development Bank Of India (SIDBI) and 10% by Union bank of
India . As on March 31, 2008 , it has a maximum market share in factoring business in India.

There are two types of factoring undertaken here:

Domestic factoring

Export factoring
Domestic factoring

Bill 2 cash (Receivables Factoring Facility):

Bill 2 Cash is a domestic factoring facility offered by us where the seller invoices the goods
to the buyer, assigns the same to SBI Factors and receives prepayment up to 90% of the
invoice value immediately. The balance amount is paid to the client when the customer pays
us.
This facility can be “With recourse” or “Non  recourse”-

Recourse Factoring: In recourse factoring , seller undertakes to collect the debt from the
buyer. In the event of the buyer failing to pay the amount on maturity, factor will recover the
amount from the client.

Non recourse Factoring :In Non recourse factoring, factor undertakes to collect the debts
from the buyer. In other words, in case the buyer fails to pay, the factor will have ‘no
recourse to the seller and will absorb the bad debts himself.
The facility covers default by the buyer on account of insolvency or willful default of the
buyer.
Cash 4 Purchase (Purchase Bill Factoring ) :
Cash for purchase is an attractive avenue of finance offered by us that facilitates instant
payment for purchases made. Generally sanctioned in conjunction with Receivable factoring
facility or Export factoring facility, Cash 4 Purchase empowers purchaser to bargain for cash
terms, best quality & immediate deliver

Export factoring
Vishwavyapaar (Export Factoring Facility):
Our Export Factoring service offers you a complete package to help you develop your
overseas business profitably and with confidence.
Under Export Factoring, we factor invoices drawn on overseas buyers and make a
prepayment of up to 90% of the invoice amount, immediately.
Under two-factor system, the factor handling the collection of export receivables of clients
(exporters) is called Export Factor (EF) and the factor in buyer’s country who undertake
collection and credit protection services is called Import factor.
The following steps are involved:

 The exporter ships the goods to importer.

 The exporter assigns his invoices through the export factor to the import factor who
assumes the credit risk. (as per prior arrangement).
 The Export factor prepays invoices
 The importer pays the proceeds to the Import factor, who transfers the amount to
Export factor
 The export factor deducts prepayment already made, other charges and pays the
balance proceeds to the exporter.

The benefits accruing to you from Export Factoring would be:

 100% credit cover, as compared to 80% offered by export credit agencies.(In case
you get the facility from a bank, you will have to go in for an ECA cover.)
 Claims will be settled in invoice currency, as against in domestic currency in case of
bank finance.
 Our counterpart, the “Import Factor”, will be located in the Importer’s country,
which ensures better due diligence on the latter.

HSBC

HSBC provides finance solutions for all your sales and purchase requirements on the
domestic front, and various export-factoring product services on the international level.

Our factoring services offer a comprehensive receivables and payables management solution
which includes transaction financing, credit protection, sales ledger administration and
payment collection.

At HSBC, our ability to be the comprehensive provider of Trade Solutions makes us a

leading player in the Trade & Factoring market in India.

We have dedicated Relationship Managers to provide any assistance that you may require
with respect to your business and your trade needs.

 Domestic Factoring
 International Factoring
 Distributor Finance

HSBC currently offers both domestic and international factoring products.

Domestic Factoring

Through this product, our intention is to be an active partner in the management of your
company's supply/delivery chain. Through domestic factoring, we could look at financing
your receivables from your buyers. Additionally we also undertake to finance your
vendor/supplier payments.

Receivables Finance can be structured with on a With Recourse Basis (where we would be
setting up lines on your company) or on a Without Recourse Basis.

Payments of all your service and utility bills could be done through our Vendor Finance
product. These could include for example, courier payments, electricity bills payments.
Through this mechanism we will pay out your service provider on the due date of the
invoice/bill and collect the money from you after a pre-determined credit period.

International Factoring

In international factoring there are usually two factors. The export factor looks at financing
the exporter and sales administration (presenting invoices at the right time, collecting
payments being the key tasks). The import factor is interested in evaluating the buyer,
collecting the money on time at the same time ensuring that he is protected against default.

International factoring encompasses all the four services, that is, pre-payments, sales ledger
administration, credit protection and collections.

7 - Step Guide to International Factoring:

1. The importer places the order for purchase of goods with the exporter.
2. The exporter requests the Export Factor for limit approval on the importer. Export
Factor in
3. Turn forwards this request to an Import Factor in the Importer's country. The Import
Factor
4. Evaluates the Importer and conveys its approval to the Export Factor who in turn
conveys
5. Commencement of the Factoring arrangement to the Exporter.
6. The exporter delivers the goods to the importer.
7. Exporter produces the documents to the Export Factor.
8. The Export Factor disburses funds to the Exporter upto the prepayment amount
decided and at the
9. Same time the forwards the documents to the Import factor and the Importer.
10. On the due date of the invoice, the Importer pays the Import Factor, who in turn
remits this
11. Payment to the Export Factor.
12. The Export Factor applies the received funds to the outstanding amount of the
advance against
 13. The invoice. The exporter receives the balance payment.

In the international product suite, apart from the existing export-factoring product, we are
now poised to launch import factoring as well. That will make us the first and only Bank
offering the entire bouquet of factoring products to customers in India.

Distributor Finance Programme (DFP)

You can use the Distributor Finance Programme (DFP) to set up a financing and collection
arrangement for your delivery chain.

The credit worthiness of distributors is established independently by HSBC and credit limits
are set up on each distributor. Regular MIS from the bank's end to both you and your
distributors ensures that the sales ledger remains updated at all times and frees you from
reconciliation issues.

Our approach is to become your business partner providing value-added services over and
above the basic funding against your receivables from the channel. This allows you to focus
the efforts of your sales team on actual sales rather than collection.

Our current portfolio carries a healthy mix of corporate clients across various industry
sectors viz. Telecommunications, Automotive components, FMCG and Textiles, to name a
few

Canara Bank
 a subsidiary of CANARA BANK, a leading Public Sector Bank, reputed
for its diversified and professional services.

 incorporated in the year 1991, with Small Industries Development Bank

of India(SIDBI) and Andhra Bank as co-promoters.

 as a Non-Banking Financial Company, the Company is governed by the

Regulatory Norms of Reserve Bank of India.

 as one of the leading factoring industry in INDIA , with a Factored Turnover of

over Rs.2592 crores (as on 31st March 2006).

 the Chairman & Managing Director and the Executive Director of

CANARA BANK are the CHAIRMAN and the VICE CHAIRMAN
 respectively of the Company.

 managed by the Managing Director, a executive in top management

cadre deputed from CANARA BANK, under the guidance and control of
Board of Directors, consisting of eminent personalities from Financial
Sector.  The day-to-day affairs of the company are managed
professionally, by a team of qualified and committed executives and
officials. We are the first factoring Company in India to secure ISO
9001:2000 Certificate by TUV (A German Agency) for having
"established and applied a Quality Management System for PROVIDING
FACTORING SERVICES".Our company continues to enjoy the highest rating of
"P1+" by CRISIL for its Short Term Debt Programme of Rs.2500 Million

The assigned ratings reflect Canbank Factors Limited's (CBF) strong

market position in the domestic factoring business and its comfortable
earnings profile. While the inherent vulnerability of its asset portfolio
(on account of the dominant exposure to small and medium
enterprises) moderates CBF's credit profile, the company's
demonstrated ability to maintain low delinquency levels is a key factor
supporting the rating. The rating also reflects the strengths that CBF
derives from its majority ownership by Canara Bank.

Bangalore, Dec 23: Canbank Factors, a subsidiary of Canara Bank, on Saturday became the
first Indian factoring company to launch export factoring.

Under export factoring, the correspondent import factor would provide credit protection to
the exporter, fix an exposure limit, and enable him to sell on open account terms without a
letter of credit or a credit insurance cover. The facility would greatly benefit the exporters
who could avail hassle free finance with complete security.

Canbank factors managing director R Ranganathan told newsmen here that the company had
achieved a turnover of Rs 400 crore for the first half of the current fiscal. He hoped the
figure would cross Rs 1000 crore for the year.

The company aimed to increase its profits by a minimum of ten per cent this year from Rs
6.4 crore last year. As on September 30 this year the non performing assets (NPAs)
accounted for 1.3 per cent.

He said export factoring would initially be offered to all the existing clients of Canara bank
and the parent company had issued a line of credit of three million dollars. Canbank factors
would become a member of the 150-member factors chain from next month. It would also
approach the RBI to permit it to take up import factoring also. The turnover of export
factoring for the first 12 months of operation had been estimated at about Rs 50 crore.

This was a modest estimate compared to the volume of exports which was growing at 25 per
cent annually, last year the exports were $38 billion .

Nearly 60 per cent of the exports were non-letter of credit based. Despite big volumes, the
margin to the company ranged between 1.5 to two per cent, Mr Ranganathan added.

The company had appointed GE Capital International Finance as its import factor in Italy.
Similarly HSBCc was being approached for undertaking the job in the US. Canara bank
chairman and managing director RJ Kamath launched the export factoring activity by
handing over a prepayment cheque to the first client M/S Markwel Hhose Industries Pvt Ltd
at a simple function at the Canara Bank headquarters here. Mr Ranganathan said Canbank
factors would shortly open its eighth branch in the country in New Delhi.

Global Trade Finance Limited (GTF)

Global Trade Finance Limited (GTF) is the only provider of international factoring, domestic
factoring and forfaiting services under one roof in India. GTF has established itself as a market
leader in international factoring providing value added services to its clients.

GTF is headquartered in Mumbai with six regional offices - one each in New Delhi, Bangalore,
Chennai, Hyderabad, Ahmedabad and Kolkata. GTF aims to be the premier export and import
solution provider in India offering professional quality services on an e-commerce platform.

GTF commenced operations in September 2001, as a joint venture promoted by Export Import Bank
of India (Exim Bank); West LB, Germany; and IFC, Washington (the private sector arm of World
Bank). In December 2004, the shareholding pattern became 40% with Exim Bank; 38.5% with FIM
Bank, Malta; 12.5% with IFC, Washington; and 9% with Bank of Maharashtra. The current
shareholding pattern is 92.85% with State Bank of India and 7.15% with Bank of Maharashtra. It has
received the necessary licences and Authorized Dealer status from RBI for conducting export and
import factoring and forfaiting business and foreign currency operations in India.

GTF is a member of Factors Chain International, a global association of international factoring

companies Established in 1968, FCI has played a major role in bringing factoring into most countries
and today has a membership of 247 factoring companies operating in 66 countries.

GTF also has arrangements with credit insurers over the world for providing credit protection.
International trade, on the basis of LC's is gradually becoming extinct. "Open Account" and
"Extended Credit" is becoming a pre-requisite for increasing sales volume in global market. GTF
helps this need with its export factoring product that provides credit assessment, credit protection,
financing, and collection services to exporters for regular sales on open account terms.

GTF uses a high end customized IT platform to process and deliver its services. With a short turn
around time in approval of facilities. GTF is the only factoring company in India to offer online web
access to its clients for accessing their accounts. GTF's "Client Access" module is custom made to
suit its business profile and caters to client requirements.

The Cost of Factoring

If your business is growing quickly, turns receivables slowly or operates in an industry that
banks are traditionally reluctant to lend to, you know that factoring may be your only option
to obtain working capital.  On the other hand, you may have spent weeks studying all of
your options for financing your business and have decided that factoring might be right for
you because it is easy, has very little paperwork compared to traditional financing, and is
based on the credit of your customers rather than yours.  Either way, there are a few things
you need to understand about factoring before you jump in head first

Keep in mind that there are many benefits to factoring.  However the first thing you need to
know about factoring is that it will generally cost your business more than traditional
financing.  When a factor buys your invoice at a discount, the discount percentage may not
sound too bad.  However, keep in mind that the discount rate multiplied by the turn
ratio equals the effective interest rate you are paying by factoring.  For example, if a factor
buys your invoice at a 1.5% discount for 30 days, you are effectively paying 18% interest
(1.5% x turn ratio of 12, which is calculated by dividing 30 into 365 days).  And obviously
the higher the discount rate or the shorter the terms, the effective interest you pay increases.

Second, factoring companies generally don't explain their fees in terms of interest rates. 
Technically, factoring fees is not interest; it is a fee.  A factor is not going to sit you down
and let you know that they are effectively charging you 18, 24 or 36 perecnt interest.  It is
not in their best interest to do that.

Third, make sure you understand what type of factoring facility you are entering into. 
Generally, your options will be to factor with or without recourse.  If you factor without
recourse, once you have sold your invoice to the factor, you are not liable if your customer
fails to make payment to the factor.  If you factor with recourse and your customer fails to
pay the factor, you will most likely be obligated to pay the factor for the invoice or replace it
with a new invoice at no cost to the factor.  Before entering into a contract with a factor, be
sure you understand if you are entering into a recourse or nonrecourse agreement and know
exactly what the terms are.

Finally, make sure that when you select a factor to work with you are comfortable with
them.  Some factors only look out for their own interests and try to take advantage of those
who don't understand the process that well.  A good factor will view his relationship with his
clients as a partnership.  The relationship has to be a win-win relationship.  A good,
reputable factor will not try and hide the true cost of factoring from his clients and will often
times encourage his clients to develop a financial plan so the client won't have to factor any
longer than necessary.  A good factor understands that if he treats his clients with fairness
and professionalism, his clients will ultimately recommend him to others.

Factoring may be your financing option of choice, or it may be your only option. 
Regardless of your reason for choosing to factor, it is best to know all the facts and
circumstances before entering into a factoring agreement.

Benefits of Factoring
There are many benefits to companies that choose to factor. In Addition to avoiding all the
paper work associated with obtaining traditional financing, factoring is easy and generally
provides instant cash. Below is a list of additional benefits of factoring:

Receive an Influx of Working Capital - The primary benefit of factoring is that it helps
your business get the working capital it needs without taking on new debt or dilluting
ownership of your company by bringing in new investors. Because today's economic
environment is highly competitive, many businesses are under immense pressure to improve
operations and undertake cost cutting measures in order to stay profitable. These problems
are compounded for small businesses becasue most small businesses are often times
understaffed to begin with. As a result, owners of small businesses frequently spend more
time on cash flow and customer credit issues rather than on their primary objectives of
growing their business, increasing sales, managing marketing campaigns and improving
employee productivity.

Many small businesses experience serious cash flow problems because their cash is tied up
in their accounts receivable. For businesses that are growing, the cash flow problems can be
even worse because more and more of their capital is not in their bank account, but is on the
balance sheet as receivables. Most businesses want to grow and expand, but if appropriate
planning is not done, an entire business will feel the squeeze because it is under capitalized.
Invoice factoring is a solution to free up your capital and have it available when you need it.
Your business will be able to invest resources in areas where it can help you become more
profitable, such as payment discounts or taking advantage of promtional prices for inventory
or supplies.

Improve Cash Flow Without Borrowing From a Bank - You can eliminate long billing
cycles and receive cash for your outstanding invoices generally within 48 hours of less. 
Since factoring is not a loan, you take on no new debt and maintain your company's leverage
to take on new debt in the future.
Capitalize on Supplier Discounts - Many suppliers offer discounts if they are paid in a
short period of time.  By factoring, you accelerate your cash flow allowing you to pay your
suppliers earlier and take advantage of supplier discounts or buy in larger quantities.

Build or Repair Your Credit Rating and Credit Score - Since factoring will give you
immediate cash, you can pay your bills on time, or possibly even early, allowing you to
build or repair your credit rating. Improving your credit rating and raising your credit score
will give you increased borrowing power when you need it.

Spend More Time Building Your Business and Less Time Collecting Money - When
you factor your invoices, you have the cash you need to operate your business.  As a result,
you can spend more time on the things that matter - sales, quality control, customer service,
and production operations.  By factoring, the issue of 'collecting' will be off your mind.

Increase Your Company's Sales By Offering Better Terms to Your Customers - If you
choose to Factor, you may offer your customers better payment terms to entice them to do
more business with you. Additionally, you will be in a position to extend credit terms to
larger customers without requiring them to pay COD.

Secure Capital By Leveraging Your Assets - Because your ability to factor is based on the
credit worthiness of your customers and not you, you can get the cash your business needs
by leveraging your outstanding receivables.

Factoring service in India is of recent origin. It owes its genesis to the recommendations of
the Kalyanasundaram Study Group appointed by the RBI in 1989. Pursuant to the
acceptance of these recommendations, the RBI issued guidelines for factoring services in
1990. The first factoring company – SBI Factors and Commercial Ltd (SBI FACS) started
operation in April 1991. This article highlights the important aspects of the factoring
services in India.

The main recommendations of the Committee/Group are listed as follows:

(1) Taking all the relevant facts into account, there is sufficient scope for introduction
factoring services in India which would be complementary to the services provided by
banks.
(2) The introduction of export factoring services would provide additional facility to
exporters.
(3) While quantification of the demand for factoring services has not been possible, it is
assessed that it would grow sufficiently so as to make factoring business a commercially
viable proposition within a period of two/three years.
(4) On the export front, there would be a fairly good availment of various services offered
by export factors.
(5) With a view to attaining a balanced dispersal of risks, factors should offer their services
to all industries and all sectors in the economy.
(6) The pricing of various services by factors would essentially depend upon the cost of
funds. Factors should attempt a mix from among the various sources of funds to keep the
cost of funds as low as possible, in any case not exceeding 13.5 percent per annum, so that a
reasonable spread is available.
(7) The RBI could consider allowing factoring organizations to raise funds from the
Discount and Finance House of India Ltd, as also from other approved financial institutions,
against their usance promissory notes covering receivables factored by them, on the liens of
revised procedure under bills discounting scheme.
(8) The price for financing services would be around 16 per cent per annum and the
aggregate price for all other services may not exceed 2.5 percent to 3 percent of the debts
services.
(9) In the beginning only select promoter institutions/groups of individuals with good track
record in financial services and competent management should be permitted to meter into
this new field.
(10) Initially the organizations may be promoted on a zonal basis.
(11) There are distinct advantages in the banks being associated with handling of factoring
business. The subsidiaries or associates of banks are ideally suited for undertaking this
business; initially, it would be desirable to have only four or five organizations which could
be promoted either individually by the leading banks or jointly by a few major banks having
a large network of branches.
(12) Factoring activities could perhaps be taken up by the Small Industries Development
Bank of India, preferably in association with one or more commercial banks.
(13) The business community should first be educated through bank branches about the
nature and scope of these services and the benefits accruing there from.
(14) Factors cannot extend their services efficiently, effectively and economically without
the support of computers, as quick and dependable means of communication. Concurrent
with consideration of various aspects relating to commencement of factoring operations the
promoters should initiate measures for organizing network of computers /dedicated lines the
branches/agents in different parts of the country for accounting follow up remittance and
other activities involved in factoring business.
(15) The Central Government ad RBI should initiate appropriate measures immediately for
setting up specialized agencies for credit investigations; until such agencies become fully
operative, factors may have to rely on such information about clients/customers as could be
collected through banks or other sources.
(16) Since the suppliers would be able to obtain financial services from both banks and
factors, it is necessary to provide for proper linkage between banks and factoring
organizations.
(17) The factoring of Small Scale Industrial (SSI) units could to be mutually beneficial to
both factors and SSI units and the factors should make every effort to orient their strategy to
crystallize, the potential demand for this sector.