Professional Documents
Culture Documents
Factoring and Forfaiting
Factoring and Forfaiting
&
FORFAITING
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FACTORING AND FORFAITING
Banking Regulation Act, 1949, was amended in 1991 for Banks setting
up factoring services.
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WHAT IS FACTORING ?
Factoring is the Sale of Book Debts by a firm (Client) to a financial institution
(Factor) on the understanding that the Factor will pay for the Book Debts as
and when they are collected or on a guaranteed payment date. Normally, the
Factor makes a part payment (usually upto 80%) immediately after the debts
are purchased thereby providing immediate liquidity to the Client.
PROCESS OF FACTORING
CLIENT CUSTOMER
FACTOR
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So, a Factor is,
a) A Financial Intermediary
b) That buys invoices of a manufacturer or a trader, at a discount,
and
c) Takes responsibility for collection of payments.
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SERVICES OFFERED BY A
FACTOR
1. Follow-up and collection of Receivables from
Clients.
2. Purchase of Receivables with or without
recourse.
3. Help in getting information and credit line on
customers (credit protection)
4. Sorting out disputes, if any, due to his
relationship with Buyer & Seller.
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PROCESS INVOLVED IN FACTORING
Client concludes a credit sale with a customer.
Client sells the customer’s account to the Factor and notifies the customer.
Factor makes the final payment to the Client when the account is collected
or on the guaranteed payment date.
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MECHANICS OF FACTORING
The Client (Seller) sells goods to the buyer and prepares invoice with a
notation that debt due on account of this invoice is assigned to and must be
paid to the Factor (Financial Intermediary).
The Client (Seller) submits invoice copy only with Delivery Challan showing
receipt of goods by buyer, to the Factor.
The Factor, after scrutiny of these papers, allows payment (,usually upto 80%
of invoice value). The balance is retained as Retention Money (Margin Money).
This is also called Factor Reserve.
The drawing limit is adjusted on a continuous basis after taking into account
the collection of Factored Debts.
Once the invoice is honoured by the buyer on due date, the Retention Money
credited to the Client’s Account.
Till the payment of bills, the Factor follows up the payment and sends regular
statements to the Client.
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CHARGES FOR FACTORING
SERVICES
Factor charges Commission (as a flat percentage of value of Debts
purchased) (0.50% to 1.50%)
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TYPES OF FACTORING
1. Recourse Factoring
2. Non-recourse Factoring
3. Maturity Factoring
4. Cross-border Factoring
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1. RECOURSE FACTORING
Upto 75% to 85% of the Invoice Receivable is factored.
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2. NON-RECOURSE FACTORING
Factor purchases Receivables on the condition that the Factor has
no recourse to the Client, if the debt turns out to be non-
recoverable.
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3. MATURITY FACTORING
Factor does not make any advance payment to the Client.
No risk to Factor.
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4. CROSS - BORDER FACTORING
It is similar to domestic factoring except that there are four parties, viz.,
a) Exporter,
b) Export Factor,
c) Import Factor, and
d) Importer.
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FACTORING
vs
BILLS DISCOUNTING
BILL DISCOUNTING FACTORING
1. Bill is separately examined 1. Pre-payment made against
and discounted. all unpaid and not due
invoices purchased by
Factor.
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FACTORING
vs
BILLS DISCOUNTING (contd…)
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STATUTES APPLICABLE TO
FACTORING
Factoring transactions in India are governed by the following
Acts:-
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WHY FACTORING HAS NOT BECOME
POPULAR IN INDIA
Banks’ reluctance to provide factoring services
Problems in recovery.
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FORFAITING
“Forfait”
is derived from French word ‘A Forfait’ which
means surrender of fights.
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FORFAITING (contd…)
EXPORTER IMPORTER
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ESSENTIAL REQUISITES OF
FORFAITING TRANSACTIONS
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IN FORFAITING:-
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CHARACTERISTICS OF FORFAITING
Converts Deferred Payment Exports into cash transactions, providing
liquidity and cash flow to Exporter.
Finance available upto 100% (as against 75-80% under conventional credit)
without recourse.
Acts as additional source of funding and hence does not have impact on
Exporter’s borrowing limits. It does not reflect as debt in Exporter’s
Balance Sheet.
Provides Fixed Rate Finance and hence risk of interest rate fluctuation does
not arise.
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CHARACTERISTICS OF FORFAITING
(contd….)
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COSTS INVOLVED IN FORFAITING
Commitment Fee:- Payable to Forfaiter by Exporter in consideration
of forefaiting services.
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FACTORING vs. FORFAITING
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STAGES INVOLVED IN FORFAITING:-
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STAGES INVOLVED IN FORFAITING:- (contd…..)
Forfaiter commits to forefait the BoE/DPN, only against Importer Bank’s Co-
acceptance. Otherwise, LC would be required to be established.
Bank sends document to Importer's Bank and confirms assignment and copies
of documents to Forefaiter.
Forfaiter commits to forefait the BoE/DPN only against Importer Bank’s Co-
acceptance. Otherwise, LC would be required to be established.
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STAGES INVOLVED IN FORFAITING:- (contd…..)
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STAGES INVOLVED IN EXPORT FACTORING
Exporter (Client) gives his name, address and credit limit required to the
Export Factor.
Exporter submits original documents, viz., invoice and shipping documents duly
assigned and receives advance there-against (upto 80%).
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STAGES INVOLVED IN EXPORT FACTORING (contd…..)
Import Factor follows up and receives payment on due date and remits to
Export Factor.
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THANK
YOU
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