AMITY GLOBAL

BUSINESS SCHOOL Noida

FACTORIN
G
AMITY GLOBAL
BUSINESS SCHOOL Noida

 The word “Factor” has been derived from

the Latin word “Facere” which means
“to make or to do or to get things done”

 Factoring may broadly be defined as the

relationship, created by an agreement,
between the seller of goods/services and a
financial institution called the factor,
whereby the latter purchases the receivables
of the former and also controls and
administers the receivables of the former.
AMITY GLOBAL
BUSINESS SCHOOL Noida

 Factor is a financial institution that

specializes in purchasing receivables
from business firms.

 Factor assumes the risk of collection of

receivables and on the event of non
payment by debtors/customers bears
the risk of bad debt and losses
AMITY GLOBAL
BUSINESS SCHOOL
Concept Noida

 Factoring is a specialized activity whereby

a firm converts its receivable into cash by
selling them to a factoring organization.

FACTOR

CUSTOME
CLIENT R
AMITY GLOBAL
BUSINESS SCHOOL Noida

• Client :- Client is the person who wants to

sell the commodity to the customer.
• Customer :- Customer is the person who
wants that commodity but he do not have
sufficient money.
• Factor :- Factor enters into agreement
with the client for rendering factor services
to it. The factor receives payment from the
buyer on due dates and remits the money
to seller after usual deductions.
AMITY GLOBAL
BUSINESS SCHOOL Noida

MECHANISM OF
FACTORING
AMITY GLOBAL
BUSINESS SCHOOL Noida
 AMITY GLOBAL
BUSINESS SCHOOL Noida
The mechanism of factoring is summed up as below:
i. An agreement is entered into between the selling firm
and the firm. The agreement provides the basis and
the scope understanding reached between the two for
rendering factor service.
ii. The sales documents should contain the instructions
to make payment directly to the factor who is assigned
the job of collection of receivables.
iii. When the payment is received by the factor, the
account of the firm is credited by the factor after
deducting its fees, charges, interest etc. as agreed.
iv. The factor may provide advance finance to the selling
firm conditions of the agreement so require.
AMITY GLOBAL
BUSINESS SCHOOL Noida
TYPES OF FACTORING
1. Recourse and Non-recourse Factoring

2. Advance and Maturity Factoring

3. Conventional or Full Factoring

4. Domestic and Export Factoring

5. Limited Factoring

6. Selected Seller Based Factoring

7. Selected Buyer Based Factoring

8. Disclosed and Undisclosed Factoring

AMITY GLOBAL
BUSINESS SCHOOL Noida

Recourse and Non-recourse Factoring

• In a recourse factoring arrangement, the

factor has recourse to the client (selling firm)
if the receivables purchased turn out to be
bad, then the risk of bad debts is to be borne
by the client and the factor does not assume
credit risks associated with the receivables.
Thus the factor acts as an agent for collection
of bills and does not cover the risk of
customer’s failure to pay debt or interest on it.
AMITY GLOBAL
BUSINESS SCHOOL Noida

• Whereas, in case of non-recourse factoring, the risk

or loss on account of non-payment by the customers
of the client is to be borne by the factor and he cannot
claim this amount from the selling firm. Since the
factor bears the risk of non-payment, commission or
fees charged for the services in case of nonrecourse
factoring is higher than under the recourse factoring.

• The additional fee charged by the factor for bearing

the risk of bad debts/non-payment on maturity is
called del credere commission.
AMITY GLOBAL
BUSINESS SCHOOL Noida

Advance and Maturity Factoring

• Under advance factoring arrangement, the factor

pays only a certain percentage (between 75 % to 90
%) of the receivables in advance to the client, the
balance being paid on the guaranteed payment
date. As soon as factored receivables are approved,
the advance amount is made available to the client
by the factor. The Factor charges discount/interest
on the advance payment from the date of such
payment to the date of actual collection of
receivables by the factor.
AMITY GLOBAL
BUSINESS SCHOOL Noida

• In case of maturity factoring, no advance is

paid to client and the payment is made to the
client only on collection of receivables or the
guaranteed payment data as the case may
be agreed between the parties. Thus,
maturity factoring consists of the sale of
accounts receivables to a factor with no
payment of advance funds at the time of sale.
AMITY GLOBAL
BUSINESS SCHOOL Noida

Conventional or Full Factoring

• Under this system the factor performs almost all services

of collection of receivables, maintenance of sales ledger,
credit collection, credit control and credit insurance. The
factor also fixes up a draw limit based on the bills
outstanding maturity wise and takes the corresponding risk
of default or credit risk and the factor will have claims on
the debtor as also the client creditor. It is also known as
Old Line Factoring.

• Factoring agencies like SBI Factors are doing full factoring

for good companies with recourse.
AMITY GLOBAL
BUSINESS SCHOOL Noida
Domestic and Export Factoring

• The basic difference between the domestic and

export factoring is on account of the number of
parties involved.
• In the domestic factoring three parties are involved,
namely:
1. Customer (buyer)
2. Client (seller)
3. Factor (financial intermediary)

All the three parties reside in the same country.

AMITY GLOBAL
BUSINESS SCHOOL Noida

• Export factoring is also termed as cross-border/international factoring

and is almost similar to domestic factoring except that there are four
parties to the factoring transaction. Namely, the exporter (selling firm or
client), the importer or the customer, the export factor and the import
factor.

• Since, two factors are involved in the export Factoring, it is also called
two-factor system of factoring.

• Two factor system results in two separate but inter-related contracts:

1. between the exporter (client) and the export factor.
2. Export factor and import factor.
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BUSINESS SCHOOL Noida
• The import factor acts as a link between export factor
and the importer, helps in solving the problem of legal
formalities and of language.

• He also assumes customer trade credit risk, and

agrees to collect receivables and transfer funds to the
export factor in the currency of the invoice.

• Export/International factoring provides a non-recourse

factoring deal.

• The exporter has 100 % protection against bad debts

loss arising on account of credit sales.
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BUSINESS SCHOOL Noida

Limited Factoring

• Under limited factoring, the factor

discounts only certain invoices on
selective basis and converts credit bills
into cash in respect of those bills only.
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BUSINESS SCHOOL Noida
Selected Seller Based Factoring

• The seller sells all his accounts receivables to the

factor along with invoice delivery challans, contracts
etc. after invoicing the customers.

• The factor performs all functions of maintaining the

accounts, collecting the debts, sending reminders to
the buyers and does all consequential and incidental
functions for the seller.

• The sellers are normally approved by the factor before

entering into factoring agreement
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BUSINESS SCHOOL Noida
Selected Buyer Based Factoring
• The factor first of all selects the buyers on the basis of
their goodwill and creditworthiness and prepares an
approved list of them.

• The approved buyers of a company approach the factor

for discounting their purchases of bills receivables
drawn in the favor of the company in question (i.e.
seller).

• The factor discounts the bills without recourse to seller

and makes the payment to the seller.
 AMITY GLOBAL
BUSINESS SCHOOL Noida
Disclosed and Undisclosed
Factoring

• In disclosed factoring, the name of the factor is mentioned

in the invoice by the supplier telling the buyer to make
payment to the factor on due date.
• However, the supplier may continue to bear the risk of bad
debts (i.e. non-payments) without passing to the factor.
• The factor assumes the risk only under nonrecourse
Factoring agreements.
• Generally, the factor lays down a limit within which it will
work as non-recourse. Beyond this limit the dealings are
done on recourse basis i.e. the seller bears the risk.
AMITY GLOBAL
BUSINESS SCHOOL Noida

• Under undisclosed factoring, the name of

the factor is not disclosed in the invoice.

• But still the control lies with the factor. The

factor maintain sales ledger of the seller of
goods, provides short-term finance against
the sales invoices but the entire
transactions take place in the name of the
supplier company (seller).
AMITY GLOBAL
BUSINESS SCHOOL Noida
FUNCTIONS OF FACTORING
The purchase of book debts or receivables is
central to the function of factoring permitting the
factor to provide basic services such as:
1. Administration of sellers’ sales ledger.
2. Collection of receivables purchased.
3. Provision of finance.
4. Protection against risk of bad debts/credit
control and credit protection.
5. Rendering advisory services by virtue of their
experience in financial dealings with
customers.
AMITY GLOBAL
BUSINESS SCHOOL Noida
1. Administration of Sales Ledger

• The factor assumes the entire responsibility

of administering sales ledger.
• The factor maintains sales ledger in respect
of each client.
• When the sales transaction takes place, an
invoice is prepared in duplicate by the
client, one copy is given to customer and
second copy is sent to the factor.
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BUSINESS SCHOOL Noida
2. Collection of Receivables
• The factor helps the client in adopting better credit control
policy.
• The main function of a factor is to collect the receivables
on behalf of the client and to relieve him from all the
botherations/ problems associated with the collection.
• This way the client can concentrate on other major areas
of his business on one hand and reduce the cost of
collection by way of savings in labor, time and efforts on
the other hand.
• The factor possesses trained and experienced personnel,
sophisticated infrastructure and improved technology
which help him to make timely demands on the debtors to
make payments.
 AMITY GLOBAL
BUSINESS SCHOOL Noida
3. Provision of Finance
• Finance, which is the lifeblood of a business, is made
available easily by the factor to the client.
• A factor purchases the book debts of his client and debts are
assigned in favor of the factor. 75% to 80 % of the assigned
debts is given as an advance to the client by the factor.
a. Where an agreement is entered into between the client
(seller) and the factor for the purchase of receivables without
recourse, the factor becomes responsible to the seller on the
due date of the invoice whether or not the buyer makes the
payment to the factor.
b. Where the debts are factored with recourse- the client has to
refund the full finance amount provided by the factor in case
the buyer fails to make the payment on due date.
 AMITY GLOBAL
BUSINESS SCHOOL Noida
4. Protection Against Risk

• This service is provided where the debts are

factored without recourse.
• The factor fixes the credit limits (i.e. the limit up
to which the client can sell goods to customers)
in respect of approved customers.
• Within these limits the factor undertakes to
purchase all trade debts and assumes risk of
default in payment by the customers.
 AMITY GLOBAL
BUSINESS SCHOOL Noida

• The factor not only relieves the client from the collection
work but also advises the client on the creditworthiness of
potential customers.

• Thus the factor helps the client in adopting better credit

control policy.

• The credit standing of the customer is assessed by the

factors on the basis of information collected from credit
rating reports, bank reports, trade reference, and financial
statement analysis and by calculating the important ratios
in respect of liquidity and profitability position.
 AMITY GLOBAL
BUSINESS SCHOOL Noida
5. Advisory Services
These services arise out of the close relationship between a
factor and a client. Since the factors have better knowledge
and wide experience in field of finance, and possess
extensive credit information about customer’s standing, they
provide various advisory services on the matters relating to:

a) Customer’s preferences regarding the client’s products.

b) Changes in marketing policies/strategies of the
competitors.
c) Suggest improvements in the procedures adopted for
invoicing, delivery and sales return.
d) Helping the client for raising finance from banks/financial
institutions, etc.
 AMITY GLOBAL
BUSINESS SCHOOL Noida
Evaluation Framework
The evaluation framework should be on a consideration of the
relative costs and benefits associated with the two alternatives to
receivables management. They are:

In-house
management by
the firm.

Factoring services
(recourse or non-
recourse)
AMITY GLOBAL
BUSINESS SCHOOL Noida
Cost Associated With In- House
Management
• Cash Discount
• Cost of funds invested in receivables
• Bad – Debts
• Lost contribution on forgone sales
• Avoidable costs of sales ledger administration and credit
monitoring.
Cost Associated With Recourse Or Non -
Recourse Factoring
• Factoring commission
• Discount charge
• Cost of long- term funds invested in receivables.
AMITY GLOBAL
BUSINESS SCHOOL Noida
Benefits • Cash Discount
• Cost of funds invested in
Associate receivables
d With • Lost contribution on forgone sales
• Avoidable costs of sales ledger
Recourse administration and credit
Factoring monitoring.

Benefits • Cash Discount

• Cost of funds invested in
Associate receivables
d With • Bad – Debts
• Lost contribution on forgone
Non - sales
Recourse • Avoidable costs of sales ledger
administration and credit
Factoring monitoring.
 AMITY GLOBAL
Factoring
BUSINESS
Factoring And Balance SheetNoida
SCHOOL

The impact of factoring on Balance Sheet is exhibited below:

Balance Sheet of ABC Co. Ltd. (Before Factoring)
Liabilities Amount(Rs) Assets Amount(Rs)
Bank Borrowings Inventory 10,00,000
Against Inventory 7,00,000 Receivables 8,00,000
Against 4,00,000 Other Current 2,00,000
Receivables Assets
Other Current 4,00,000
Liabilities 5,00,000
Net Working
Capital

Total 20,00,000 Total 20,00,000

Current Ratio = Current Assets / Current Liabilities

= Rs. 20,00,000 / Rs. 15,00,000 = 1.33 : 1
AMITY GLOBAL
Balance Sheet of ABC Co. Ltd. (After Factoring 80% of
BUSINESS SCHOOL receivables) Noida
Liabilities Amount(Rs) Assets Amount(Rs)
Bank Borrowings Inventory 10,00,000
Against Inventory 7,00,000 Due from factor 1,60,000
Against - Other Current
Receivables Assets 2,00,000
Other Current 1,60,000
Liabilities
Net Working 5,00,000
Capital

Total 13,60,000 Total 13,60,000

Current Ratio = Current Assets / Current Liabilities
= Rs. 13,60,000 / Rs. 8,60,000
 Reduction of Current Liabilities.
 Improvement in Current Ratio and Efficiency.
 Higher credit standing.
Reduction of cost and expenses.
 AMITY GLOBAL
BUSINESS SCHOOL Noida
Factoring And Profit And Loss Account
The Benefits of factoring in terms of the profit and loss account
are analyzed as under:
The factor performs basis functions like administration of seller’s
sales ledger, credit control, collection of dues, etc. This saves the
administration costs.

The improved liquidity position enables the firm to honor its

obligations without any delay.

The improved credit standing helps the firm to get the benefits of
lower purchase price, longer credit period from suppliers, trade
discount on bulk purchases, cash discount on early payment,
better market standing, quicker sanction of loans and advances,
and better terms and conditions while borrowing etc.
 AMITY GLOBAL
Illustration:
BUSINESS SCHOOL Noida

The following are the important assumptions made in constructing

the statement:
• The average receivables of the firms are equal to two months’
sales.
•All sales are on credit basis.
•Cost of goods sold is equal to 60% of the sales.
•Administration costs (which includes credit department expenses
of Rs. 2,00,000) and selling costs are assumed to be Rs. 8,00,000
and Rs. 16,00,000 respectively.
•The bad debts loss percentage is 5% of gross value of sales.
•The factor charges 2% commission on gross value of sales.
•The interest charged by the factor as well as by other financial
institutions on advance is assumed to be 18% per annum.
•The margin money is 10%.Material cost is saved by 2.5% on
account of lower prices, trade discount, cash discount, etc.
AMITY GLOBAL
BUSINESS
Profit and SCHOOL Noida
Loss Account of ABC Co. Ltd (Before Factoring)
Particulars Amount (in Particulars Amount (in Rs.)
Rs.)
To Material cost 36,00,000 By Sales 120,00,000
To Labour cost 20,00,000
To Factory Expenses 16,00,000
To Gross Profit 48,00,000
120,00,000 120,00,000
To Administrative By Gross Profit 48,00,000
expenses 6,00,000
To Credit Dept. Expense 2,00,000
To Selling Expenses 16,00,000
To Bad debts 6,00,000
To Interest on loan 3,60,000
To Net Profit 14,40,000

48,00,000 48,00,000

Interest on loan = Rs. 1,20,00,000 x 2/12 x 18/100

= Rs. 3,60,000
Particulars Amount (in Particulars Amount (in Rs.)
AMITY GLOBAL Rs.)
ToBUSINESS
Material cost SCHOOL
35,10,000 By Sales 120,00,000Noida
To Labour cost 20,00,000
To Factory Expenses 16,00,000
To Gross Profit 48,90,000
120,00,000 120,00,000
To Administrative By Gross Profit 48,90,000
expenses 6,00,000
To Selling Expenses 16,00,000
To Factoring Commission
@ 2% 2,40,000
To Interest on advance 2,80,800
To Net Profit 21,70,200

48,90,000 48,90,000

Where, Material cost = Rs. 36,00,000 – 2.5% of Rs. 36,00,000 = Rs. 35,10,000
Amount of advance = Average receivables – Commission @ 2% on sales
– 10% reserve.
= Rs. 1,20,00,000 x 2/12 – Rs. 2,40,000 – 10% x Rs. 1,20,00,000 x 2/12
= Rs. 20,00,000 – Rs. 2,40,000 – Rs. 2,00,000 = Rs. 15,60,000.
Interest on Advance = 18% of Rs. 15,60,000 = Rs. 2,80,800.
 AMITY GLOBAL
BUSINESS SCHOOL
Particulars Amount (in Rs.) Amount (inNoida
Rs.)
Benefits of Factoring:
• Savings in Material costs 90,000
• Credit Dept. Expenses 2,00,000
• Bad Debts losses avoided 6,00,000
• Interest on loan 3,60,000 12,50,000

Less: Costs of factoring:

Factoring Commission 2,40,000
Interest on Advance 2,80,800 5,20,800
Net Benefits of Factoring 7,29,200 7,29,200

The Profit and Loss Account and its summary clearly indicate
that the overall profitability of ABC Co. Ltd. is increased by
Rs. 7,29,200. This increase the ROI and dividend rate, if the
management so desires.
 AMITY GLOBAL
NeedSCHOOL
BUSINESS for FactoringServices in India andNoida
Assessment of Demand:

• There is sufficient scope for the introduction of

factoring services in India, which would be
complementary to the services provided by banks.

• The introduction of export factoring services in India

would provide an additional facility to exporters.

• With a view to attaining a balanced dispersal of

risks, factors should offer their services to all
industries and all sectors of the economy .
AMITY GLOBAL
BUSINESS SCHOOL RBI Guidelines: Noida

• Banks are permitted to set up separate subsidiaries/invest in

factoring companies.

• should not engage in financing of other companies or other

factoring companies.

• Investment of a bank cannot exceed in the aggregate 10% of

paid-up capital and reserves of the bank.

• According to the RBI guidelines (2010), banks now with the

prior approval of RBI can form subsidiary companies for
undertaking the factoring services and other incidental
activities.
AMITY GLOBAL
Advantages of Factoring:
BUSINESS SCHOOL Noida

Increases working capital

Avoid additional liabilities

Improves credit monitoring

Reduces administrative cost

Reduce supplier credit costs

Protection against bad-debts in case of non-

recourse

Better management of the organization

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BUSINESS SCHOOL Noida
Disadvantages of Factoring:

Cost

Possible harm to
customer
relation
Company image
distortion
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BUSINESS SCHOOL Noida
Bill Discounting

• Trading or selling a bill of exchange prior

to the maturity date at a value less than
the par value of the bill. The amount of the
discount will depend on the amount of time
left before the bill matures, and on the
perceived risk attached to the bill.
 AMITY GLOBAL Difference b/w Factoring & Bill Discounting
BUSINESS SCHOOL Noida

CHARACTERSTICS FACTORING BILLS DISCOUNTING

1. Recourse with or without recourse. Always with recourse.
2. Collector Factor is the collector of Drawer is the collector of the
receivables. receivables.
3. Ownership Factor purchases the trade debt Financier acts simply as an agent
and thus becomes a holder for of his customer and he does not
value. become the owner.
4. Services Also provides other services like Only financing facility is available.
sales ledger maintenance and
advisory services.
5. Rediscounting Debts purchased for factoring Discounted bills may be
cannot be rediscounted. rediscounted several times
before they mature for payment.

6. Mode of It is an off-balance sheet No such possibility.

accounting financing.
AMITY GLOBAL
BUSINESS SCHOOL Noida

Forfaiting

• Forfaiting is a form of financing of

receivables pertaining to international
trade. Forfaiting is the purchase of a series
of credit instruments such as drafts, bills of
exchange, other freely negotiable
instruments on a nonrecourse basis.
 AMITY GLOBAL Difference b/w Factoring & Bill Discounting
BUSINESS SCHOOL Noida

BASIS OF DIFFERENCE FACTORING FORFAITING

1. Extent of Finance Usually 75-85% of the value of 100% Financing.

the invoice is considered for
advance.
2. Recourse May be with or without recourse. Always without recourse.

3. Type of transaction Either domestic transaction or Always export transaction.

export transaction.

4. Services Provided other allied services are It is a pure financing

provided. arrangement.

5. Maturity Advances are short-term in Advances are generally

nature. medium term spread over 3-
5 years.
6.Exchange rate It does not guard against Forfaiter charges a premium
fluctuations exchange rate fluctuations. for such risk.
AMITY GLOBAL
BUSINESS SCHOOL Factoring in India Noida

• SBI Factors and Commercial Services (SBI FACS) Ltd

• Canbank Factors Ltd
• Foremost Factors Ltd (FFL)
• Global Trade Finance Ltd (GTF)
• The Hongkong and Shanghai Bank Corporation Limited
(HSBC)
• Export Credit Guarantee Corporation of India Ltd. (ECGC)
• India Factoring and Finance Solutions Pvt Ltd (India
Factoring)
AMITY GLOBAL
BUSINESS SCHOOL
SBI FACS Ltd Noida

• Subsidiary of State Bank of India.

• 1st factoring company to be set up in India.
• incorporated in February 1991 & commenced
business operations from April 1991.
• SBI and its 2 associate banks have a 70% stake
in SBI Factors while 20% is held by SIDBI and
10% by Union bank of India. 
• offers Domestic Factoring with recourse and
without recourse, purchase bill factoring,
factoring of Usance Bills etc.
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BUSINESS SCHOOL Noida

• jointly promoted by the Canara Bank, Andhra Bank

and SIDBI in August,1992.
• its Rs. 10 crore paid-up capital was contributed in
the proportion of 60:20:20 by three promoters
respectively.
• Initially operated in the south zone but regional
restrictions on their operations were subsequently
removed by the RBI.
• main services provided by the Canbank Factors
Ltd are domestic factoring and invoice discounting.
AMITY GLOBAL
BUSINESS SCHOOL Foremost Factors Ltd Noida

• incorporated in February 1996.

• promoted by Mohan Group and Nations Bank
Overseas Corporation of U.S.A. along with 20th
Century Finance Corporation Limited (TCFC Limited)
and ICDS Group as institutional investors.

• Changed its name to IFCI Factors Limited as when

IFCI acquire the share capital of the company in 2008-
09.
• major services are domestic sales bill factoring,
purchase bill factoring, export sales bill factoring and
corporate loan.
AMITY GLOBAL
BUSINESS SCHOOL Global Trade Finance Ltd
Noida

• joint venture between EXIM Bank, India’s premier export

finance institution, International Factoring Corporation(IFC)
Washington, FIN Bank, Malta and Bank of Maharashtra.

• incorporated on March 13, 2001 with a paid-up capital of

Rs. 45 crore.

• Offers export-financing solutions such as Forfaiting and

Factoring for small and medium sized Indian exporters
(SMEs)
• only factoring company in India to offer online web access
to its clients for accessing their accounts.
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BUSINESS SCHOOL Noida

• it introduces its own direct factoring services in 1997-98 to help small

scale sector in timely recovery of their sale proceeds.

• Factoring scheme of SIDBI is a comprehensive package of receivables

management service including advance against invoices and other allied
services such as collection of proceeds from the purchaser, administration
of sales ledger etc.

• aims to ensure adequate liquidity at all times.

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BUSINESS SCHOOL Noida

The Hongkong and Shanghai Bank Corporation Limited

• discontinued providing factoring services in the year

2008 after providing this service for a period of 5 years.
It has now re-launched the product with a few changes
concentrating majorly on MSMEs.  
• Services provided by HSBC are: Domestic Factoring,
Invoice Factoring and Export Factoring.
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BUSINESS SCHOOL Noida

•The Export Credit Guarantee Corporation of India

Limited  is a company wholly owned by the Government
of India.
• initially set up Export Risks Insurance Corporation
(ERIC) in July 1957.

• transformed into Export Credit and Guarantee

Corporation Limited (ECGC) in 1964 and to Export Credit
Guarantee of India in 1983.

• introduced non-recourse maturity export factoring. But

later ECGC restructured its ‘maturity factoring’ scheme
and finally launched full fledged factoring scheme.
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BUSINESS SCHOOL Noida

• established in December 2009.

• providing trade finance services for small and medium

enterprises (SMEs) and small-scale industries with a
special focus on the ever-increasing international
(export and import) and domestic factoring.

• The objective of the Company is to provide factoring

and forfaiting services, encompassing finance and value
added services, efficiently and competently.