FACTORING & FORFAITING

Factoring is of recent origin in Indian Context. Kalyana Sundaram Committee recommended introduction of factoring in 1989. Banking Regulation Act, 1949, was amended in 1991 for Banks setting up factoring services.

SBI/Canara Bank have set up their Factoring Subsidiaries: SBI Factors Ltd., (April, 1991) CanBank Factors Ltd., (August, 1991).
RBI has permitted Banks to undertake factoring services through subsidiaries.

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. theFactor makes a part payment (usually upto 80%) immediately after the debts are purchased thereby providing immediate liquidity to the Client.

Normally,

So, a Factor is,

a) b) c)

A Financial Intermediary That buys invoices of a manufacturer or a trader, at a discount, and Takes responsibility for collection of payments.

The parties involved in the factoring transaction are:a) b) c)

Supplier or Seller (Client) Buyer or Debtor (Customer) Financial Intermediary (Factor)

SERVICES OFFERED BY A FACTOR

1. 2. 3. 4.

Follow-up and collection of Receivables from Clients. Purchase of Receivables with or without recourse. Help in getting information and credit line on customers (credit protection) Sorting out disputes, if any, due to his relationship with Buyer & Seller.

1). Client concludes a credit sale with a customer. 2). Client sells the customers account to the Factor and notifies the customer.

PROCESS INVOLVED IN FACTORING

3). Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance.
4). Factor maintains the customers account and follows up for payment.

5). Customer remits the amount due to the Factor.

6). Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.

MECHANICS OF FACTORING
1). The customer place an order with the client on the credit base, client deliver the goods or services to the customer and send invoice also. 2). The Client (Seller) submits invoice copy only with Delivery Challan showing receipt of goods by buyer, to the Factor. 3). The Factor makes 80% payment on behalf of customer to the client. This is also called Factor Reserve.

4). The factor send statement to customer for follow up.

5). Customer makes full payment to the factor.

6). The factor makes balance 20% payment to client upon the realization date.

CHARGES FOR FACTORING SERVICES

Finance charge:

It is related to the financing like interest charges by the bank.

Service charge:

Service charges are nominal charges to cover the cost of services, maintenance of sales ledger, collection fees etc

TYPES OF FACTORING

Recourse Factoring
Non-recourse Factoring

Maturity Factoring
Cross-border Factoring Oldline Factoring

RECOURSE FACTORING
Upto 75% to 85% of the Invoice Receivable is

factored.

In case of default or non payment by a trade

debtor, the client refunds the amount to the factor.

Credit Risk is with the Client as this type of

factoring does not including bad debt protection.

In India, factoring is done with recourse.

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.

Credit risk is with the Factor. Higher commission is charged.

In USA/UK, factoring is commonly done without

recourse.

MATURITY FACTORING
Factor does not make any advance payment to the

Client.

Pays on guaranteed payment date or on collection

of Receivables.

Nominal Commission is charged.

No risk to Factor.

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. It is also called two-factor system of factoring.

Exporter (Client) enters into factoring arrangement with Export Factor in his country and assigns to him export receivables.

Export Factor enters into arrangement with Import Factor and has arrangement for credit evaluation & collection of payment for an agreed fee. Notation is made on the invoice that importer has to make payment to the Import Factor.
Import Factor collects payment and remits to Export Factor who passes on the proceeds to the Exporter after adjusting his advance, if any. Where foreign currency is involved, Factor covers exchange risk also.

OLD LINE FACTORING

Combination of non-recourse factoring and advanced factoring. It provides an entire spectrum of services that is collection, credit protection, sales ledger and short term finance etc

1). To the client,

- The credit sales are immediately converted into

ready cash as factor makes a payment around 80%.

-Cash realized can be used for the production

cycle.

- The client is free from the tension of monitoring

his sales ledger and so he can concentrate on production and marketing.

2). To the customers,

- Customers get adequate credit period.

- Customers save on bank charges and expenses.

- The customer has not to furnish any documents, as

they are furnished with periodical statements of outstanding invoices by the factor.

3). To the Banks,

- Banks can get financial charges for its service.