Factoring

FACTORING

Dr. Sarbesh Mishra NICMAR, Hyderabad.

Backdrop o Working capital gets tied up in the form of trade debts. o The average collection period has been on increase. o Delays in collection results in liquidity problems and consequently to delay in production and supplies. o Increases the cost of capital, reduces profit and competitiveness of a company. 9/9/2009

Dr Sarbesh Mishra

Factor - Meaning o Factor means “to make or to do” in other words ‘to get things done’. o Dictionary meaning of Factor means ‘an agent’, engaged in financing the operations of certain companies, through the purchase of account receivables.

9/9/2009

Dr Sarbesh Mishra

Definition o Factoring is an continuous arrangement between financial institution, (namely the factor) and a company (namely client) which sells goods and services to trade customers on credit. o Factoring is a service of financial nature involving the conversion of credit bills into cash. 9/9/2009

Dr Sarbesh Mishra

Modus Operandi oA factoring arrangement (invoice purchasing arrangement) between client and the factor, which is the financing organisation. o Selling of goods by client results in preparation of invoices o Goods are sent to the buyers without raising the B/E but by invoice. 9/9/2009

Dr Sarbesh Mishra

Contd…. o The trade debt due by the purchaser to the client is assigned to the factor. o Purchaser is required to pay to the factor. o Client hands over the invoices to the factor under cover of a schedule of offer along with copies of invoices. o Factor makes an immediate up to 80% of the assigned invoices and balance to be paid on realisation of the debt. 9/9/2009

Dr Sarbesh Mishra

Terms and Conditions o Assignment of debt in favor of factor o Selling limits for the client o Conditions within which the factor will have recourse to the client in case of nonpayment by trade customer o Details regarding the payment to the factor for his services o Limit of any overdraft facility and the rate of interest to be charged by the factor 9/9/2009

Dr Sarbesh Mishra

Functions o Purchase and collection of debts o Sales ledger management o Credit investigation and undertaking of credit risk o Provision of finance against debts o Rendering consultancy services

9/9/2009

Dr Sarbesh Mishra

Types of Factoring o o o o o o o

Non Recourse Factoring Recourse Factoring Maturity Factoring Bulk Factoring Invoice Factoring Agency Factoring International Factoring

9/9/2009

Dr Sarbesh Mishra

Factoring Vs. Discounting Only those trade debts backed by account receivable. II. This is outright purchase of II. Kind of advance against the trade debts bills III. Non-recourse factoring is III. Discounting is always with also available recourse IV. It includes several IV. It is only for provision of specialized operations finance V. No such registration is V. Discounting requires required registration charges with RoC. I.

Covers entire trade debts

9/9/2009

I.

Dr Sarbesh Mishra