Factoring

Chapter 1 History of factoring

1|Page

History Factoring's origins lie in the financing of trade, particularly international trade. Factoring as a fact of business life was underway in England prior to 1400. It appears to be closely related to early merchant banking activities. The latter however evolved by extension to non-trade related financing such as sovereign debt. Like all financial instruments, factoring evolved over centuries. This was driven by changes in the organization of companies; technology, particularly air travel and non-face to face communications technologies starting with the telegraph, followed by the telephone and then computers. These also drove and were driven by modifications of the common law framework in England and the United States.

Governments were latecomers to the facilitation of trade financed by factors. English common law originally held that unless the debtor was notified, the assignment between the seller of invoices and the factor was not valid. The Canadian Federal Government legislation governing the assignment of moneys owed by it still reflects this stance as does provincial government legislation modeled after it. As late as the current century the courts have heard arguments that without notification of the debtor the assignment was not valid. In the United States it was only in 1949 that the majority of state governments had adopted a rule that the debtor did not have to be notified thus opening up the possibility of non-notification factoring arrangements.

Originally the industry took physical possession of the goods, provided cash advances to the producer, financed the credit extended to the buyer and insured the credit strength of the buyer. In England the control over the trade thus obtained resulted in an Act of Parliament in 1696 to mitigate the monopoly power of the factors. With the development of larger firms who built their own sales forces, distribution channels, and knowledge of the financial strength of their customers, the needs for factoring services were reshaped and the industry became more specialized.

2|Page

By the twentieth century in the United States factoring became the predominant form of financing working capital for the then high growth rate textile industry. In part this occurred because of the structure of the US banking system with its myriad of small banks and consequent limitations on the amount that could be advanced prudently by any one of them to a firm. In Canada, with its national banks the limitations were far less restrictive and thus factoring did not develop as widely as in the US. Even then factoring also became the dominant form of financing in the Canadian textile industry.

Today factoring's rationale still includes the financial task of advancing funds to smaller rapidly growing firms who sell to larger more creditworthy organizations. While almost never taking possession of the goods sold, factors offer various combinations of money and supportive services when advancing funds.

Factors often provide their clients four key services: information on the creditworthiness of their prospective customers domestic and international; maintain the history of payments by customers (i.e., accounts receivable ledger); daily management reports on collections; and, make the actual collection calls. The outsourced credit function both extends the small firms effective addressable marketplace and insulates it from the survival-threatening destructive impact of a bankruptcy or financial difficulty of a major customer. A second key service is the operation of the accounts receivable function. The services eliminate the need and cost for permanent skilled staff found within large firms. Although today even they are outsourcing such back office functions. More importantly, the services insure the entrepreneurs and owners against a major source of a liquidity crises and their equity.

In the latter half of the twentieth century the introduction of computers eased the accounting burdens of factors and then small firms. The same occurred for their ability to obtain information about debtor’s creditworthiness. Introduction of the Internet and the web has accelerated the process while reducing costs. Today credit information and insurance coverage is available any time of the day or night online. The web has also made it possible for factors and their clients to collaborate in real time on collections. Acceptance of signed documents provided by facsimile as being legally binding has eliminated the need for physical delivery of “originals”, thereby reducing time delays for entrepreneurs. 3|Page

By the first decade of the twenty first century a basic public policy rationale for factoring remains that the product is well suited to the demands of innovative rapidly growing firms critical to economic growth. A second public policy rationale is allowing fundamentally good business to be spared the costly management time consuming trials and tribulations of bankruptcy protection for suppliers, employees and customers or to provide a source of funds during the process of restructuring the firm so that it can survive and grow.

4|Page

Chapter 2 Introduction

5|Page

Introduction Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.

It is different from the forfeiting in the sense that forfeiting is a transaction based operation while factoring is a firm based operation - meaning, in factoring, a firm sells all its receivables while in forfeiting, the firm sells one of its transactions.

Factoring is a word often misused synonymously with invoice discounting - factoring is the sale of receivables whereas invoice discounting is borrowing where the receivable is used as collateral.

The three parties directly involved are: the one who sells the receivable, the debtor, and the factor. The receivable is essentially a financial asset associated with the debtor’s Liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), to obtain cash. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights and risks associated with the receivables. Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections. Critical to the factoring transaction, the seller should never collect the payments made by the account debtor, otherwise the seller could potentially risk further advances from the factor. There are three principal parts to the factoring transaction; a.) the advance, a percentage of the invoice face value that is paid to the seller upon submission, b.) the reserve, the remainder of the total invoice amount held until the payment by the account debtor is made and c.) the fee, the cost associated with the transaction 6|Page

which is deducted from the reserve prior to it being paid back the seller. Sometimes the factor charges the seller a service charge, as well as interest based on how long the factor must wait to receive payments from the debtor. The seller also estimates the amount that may not be collected due to nonpayment, and makes accommodation for this when determining the amount that will be given to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment.

American Accounting considers the receivables sold when the buyer has "no recourse", or when the financial transaction is substantially a transfer of all of the rights associated with the receivables and the seller's monetary Liability under any "recourse" provision is well established at the time of the sale. Otherwise, the financial transaction is treated as a loan, with the receivables used as collateral.

7|Page

Chapter 3 Reason for Factoring

8|Page

Reason for Factoring Factoring is a method used by a firm to obtain Cash when the available Cash Balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs, such as new orders or contracts. The use of Factoring to obtain the Cash needed to accommodate the firm’s immediate Cash needs will allow the firm to maintain a smaller ongoing Cash Balance. By reducing the size of its Cash Balances, more money is made available for investment in the firm’s growth. A company sells its invoices at a discount to their face value when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its "customer's bank." Accordingly, Factoring occurs when the rate of return on the proceeds invested in production exceed the costs associated with Factoring the Receivables. Therefore, the trade off between the return the firm earns on investment in production and the cost of utilizing a Factor is crucial in determining both the extent Factoring is used and the quantity of Cash the firm holds on hand.

Many businesses have Cash Flow that varies. A business might have a relatively large Cash Flow in one period, and might have a relatively small Cash Flow in another period. Because of this, firms find it necessary to both maintain a Cash Balance on hand, and to use such methods as Factoring, in order to enable them to cover their Short Term cash needs in those periods in which these needs exceed the Cash Flow. Each business must then decide how much it wants to depend on Factoring to cover short falls in Cash, and how large a Cash Balance it wants to maintain in order to ensure it has enough Cash on hand during periods of low Cash Flow.

Generally, the variability in the cash flow will determine the size of the Cash Balance a business will tend to hold as well as the extent it may have to depend on such financial mechanisms as Factoring. Cash flow variability is directly related to 2 factors:

1. The extent Cash Flow can change, 2. The length of time Cash Flow can remain at a below average level.

9|Page

If cash flow can decrease drastically, the business will find it needs large amounts of cash from either existing Cash Balances or from a Factor to cover its obligations during this period of time. Likewise, the longer a relatively low cash flow can last, the more cash is needed from another source (Cash Balances or a Factor) to cover its obligations during this time. As indicated, the business must balance the opportunity cost of losing a return on the Cash that it could otherwise invest, against the costs associated with the use of Factoring.

The Cash Balance a business holds is essentially a Demand for Transactions Money. As stated, the size of the Cash Balance the firm decides to hold is directly related to its unwillingness to pay the costs necessary to use a Factor to finance its short term cash needs. The problem faced by the business in deciding the size of the Cash Balance it wants to maintain on hand is similar to the decision it faces when it decides how much physical inventory it should maintain. In this situation, the business must balance the cost of obtaining cash proceeds from a Factor against the opportunity cost of the losing the Rate of Return it earns on investment within its business.

10 | P a g e

Chapter 4 Differences from bank loans

11 | P a g e

Differences from bank loans Factors make funds available, even when banks would not do so, because factors focus first on the credit worthiness of the debtor, the party who is obligated to pay the invoices for goods or services delivered by the seller. In contrast, the fundamental emphasis in a bank lending relationship is on the creditworthiness of the borrower, not that of its customers. While bank lending is cheaper than factoring, the key terms and conditions under which the small firm must operate differ significantly.

From a combined cost and availability of funds and services perspective, factoring creates wealth for some but not all small businesses. For small businesses, their choice is slowing their growth or the use of external funds beyond the banks. In choosing to use external funds beyond the banks the rapidly growing firm’s choice is between seeking venture capital (i.e., equity) or the lower cost of selling invoices to finance their growth. The latter is also easier to access and can be obtained in a matter of a week or two, whereas securing funds from venture capitalists can typically take up to six months. Factoring is also used as bridge financing while the firm pursues venture capital and in conjunction with venture capital to provide a lower average cost of funds than equity financing alone. Firms can also combine the three types of financing, angel/venture, factoring and bank line of credit to further reduce their total cost of funds whilst at the same time improving cash flow.

As with any technique, factoring solves some problems but not all. Businesses with a small spread between the revenue from a sale and the cost of a sale, should limit their use of factoring to sales above their breakeven sales level where the revenue less the direct cost of the sale plus the cost of factoring is positive.

While factoring is an attractive alternative to raising equity for small innovative fast-growing firms, the same financial technique can be used to turn around a fundamentally good business whose management has encountered a perfect storm or made significant business mistakes which have made it impossible for the firm to work within the constraints of their bank covenants. The value of using factoring for this purpose is that it provides management time to implement the changes required to turn the business around. The firm is paying to have the option of a future the owners’ control. The association of factoring with troubled situations accounts for the half truth of it being labeled 'last resort' financing. 12 | P a g e

However, use of the technique when there is only a modest spread between the revenue from a sale and its cost is not advisable for turnarounds. Nor are turnarounds usually able to recreate wealth for the owners in this situation.

Large firms use the technique without any negative connotations to show cash on their balance sheet rather than an account receivable entry, money owed from their customers, particularly when these show payments being due for extended periods of time beyond the North American norm of 60 days or less.

Invoice sellers The invoice seller presents recently generated invoices to the factor in exchange for a dollar amount that is less than the value of the invoice(s) by an agreed upon discount and a reserve. A reserve is a provision to cover short payments, payment of less than the full amount of the invoice by the debtor, or a payment received later than expected. The result is an initial payment followed by a second one equal to the amount of the reserve if the invoice is paid in full and on time or a credit to the account of the seller with the factor. In an ongoing relationship the invoice seller will get their funds one or two days after the factor receives the invoices. Astute invoice sellers can use a combination of techniques to cover the range of 1% to 5% plus cost of factoring for invoices paid within 50 to 60 days or more. In many industries, customers expect to pay a few percentage points higher to get flexible sales terms. In effect the customer is willing to pay the supplier to be their bank and reduce the equity the customer needs to run their business. To counter this it is a widespread practice to offer a prompt payment discount on the invoice. This is commonly set out on an invoice as an offer of a 2% discount for payment in ten days. {Few firms can be relied upon to systematically take the discount, particularly for low value invoices - under $100,000 - so cash inflow estimates are highly variable and thus not a reliable basis upon which to make commitments.} Invoice sellers can also seek a cash discount from a supplier of 2 % up to 10% (depending on the industry standard) in return for prompt payment. Large firms also use the technique of factoring at the end of reporting periods to ‘dress’ their balance sheet by showing cash instead of accounts receivable There are a number of varieties of factoring arrangements offered to invoice sellers depending upon their specific requirements. The basic ones are described under the heading Factors below.

13 | P a g e

Factors When initially contacted by a prospective invoice seller, the factor first establishes whether or not a basic condition exists, does the potential debtor(s) have a history of paying their bills on time? That is, are they creditworthy? (A factor may actually obtain insurance against the debtor’s becoming bankrupt and thus the invoice not being paid.) The factor is willing to consider purchasing invoices from all the invoice seller’s creditworthy debtors. The classic arrangement which suits most small firms, particularly new ones, is full service factoring where the debtor is notified to pay the factor (notification) who also takes responsibility for collection of payments from the debtor and the risk of the debtor not paying in the event the debtor becomes insolvent, non recourse factoring. This traditional method of factoring puts the risk of non-payment fully on the factor. If the debtor cannot pay the invoice due to insolvency, it is the factor's problem to deal with and the factor cannot seek payment from the seller. The factor will only purchase solid credit worthy invoices and often turns away average credit quality customers. The cost is typically higher with this factoring process because the factor assumes a greater risk and provides credit checking and payment collection services as part of the overall package. For firms with formal management structures such as a Board of Directors (with outside members), and a Controller (with a professional designation), debtors may not be notified (i.e., non-notification factoring). The invoice seller may not retain the credit control function. If they do then it is likely that the factor will insist on recourse against the seller if the invoice is not paid after an agreed upon elapse of time, typically 60 or 90 days. In the event of non-payment by the customer, the seller must buy back the invoice with another credit worthy invoice. Recourse factoring is typically the lowest cost for the seller because they retain the bad debt risk, which makes the arrangement less risky for the factor.

Despite the fact that most large organizations have in place processes to deal with suppliers who use third party financing arrangements incorporating direct contact with them, many entrepreneurs remain very concerned about notification of their clients. It is a part of the invoice selling process that benefits from salesmanship on the part of the factor and their client in its conduct. Even so, in some industries there is a perception that a business that factors its debts is in financial distress.

14 | P a g e

Invoice payers (debtors) Large firms and organizations such as governments usually have specialized processes to deal with one aspect of factoring, redirection of payment to the factor following receipt of notification from the third party (i.e., the factor) to whom they will make the payment. Many but not all in such organizations are knowledgeable about the use of factoring by small firms and clearly distinguish between its use by small rapidly growing firms and turnarounds.

Distinguishing between assignment of the responsibility to perform the work and the assignment of funds to the factor is central to the customer/debtor’s processes. Firms have purchased from a supplier for a reason and thus insist on that firm fulfilling the work commitment. Once the work has been performed however, it is a matter of indifference who is paid. For example, General Electric has clear processes to be followed which distinguish between their work and payment sensitivities. Contracts direct with US Government require an Assignment of Claims which is an amendment to the contract allowing for payments to third parties (factors).

15 | P a g e

Chapter 5 Risks

16 | P a g e

Risks The most important risks of a factor are:

• Counter party credit risk related to clients and risk covered debtors. Risk covered debtors can be reinsured, which limit the risks of a factor. Trade receivables are a fairly low risk asset due to their short duration.

• External fraud by clients: fake invoicing, mis-directed payments, pre-invoicing, not assigned credit notes, etc. A fraud insurance policy and subjecting the client to audit could limit the risks.

• Legal, compliance and tax risks: large number of applicable laws and regulations in different countries.

• Operational risks, such as contractual disputes.

• Uniform Commercial Code (UCC-1) securing rights to assets

• IRS liens associated with payroll taxes etc.

• ICT risks: complicated, integrated factoring system, extensive data exchange with client.

17 | P a g e

Chapter 6 How factoring works?

18 | P a g e

How factoring works? Factoring provides a fast prepayment against your sales ledger. It allows you, at a cost, to flexibly increase your working capital and improve cash flow. Factoring is offered to businesses trading with other businesses on credit terms. It is not normally available to retailers or to cash traders. When factoring starts

Factors can be independent, or subsidiaries of major banks and financial institutions. Whatever their background, they will want to meet you, visit your business, review your financial situation and study your business plan to evaluate your suitability for a factoring facility. Credit limits might be required - if so, you must agree how they will operate. After signing the agreement, the factor will typically agree to advance up to 85 per cent of approved invoices. Payment is usually made within 24 hours. Usually all sales go through the factor. Check the notification period - most factors require three months' notice to end the service, but some require longer. Negotiate if you are not happy with the notice period. Factoring is a complex, long-term agreement. It is advisable to consult your solicitor on the legal and financial implications of factoring.

When an invoice is raised •

You raise an invoice, which has instructions to pay the factor directly and send it to the

customer. Send a copy of it to the factor. •

The factor pays an agreed percentage of the invoice to you.

•

The factor issues statements to the customer on your behalf. It operates credit control

procedures including telephoning the customer if necessary.

19 | P a g e

When an invoice is paid by the customer •

The customer should pay 100 per cent of the invoice directly to the factor.

•

The factor pays the balance of the invoice to you. Fees and interest will be deducted from the

payment.

When an invoice is not paid If an invoice is not paid, responsibility for paying the debt will depend on the type of agreement - either recourse factoring or non-recourse factoring.

20 | P a g e

Chapter 7 How to choose a factor?

21 | P a g e

How to choose a factor? There are a variety of factors to choose from. Some are subsidiaries of major banks and financial institutions, others are independent. You need to be able to make an informed choice, so it's worth approaching more than one factor before making a decision. The Asset Based Finance Association (ABFA) will supply a list of factors, and also give details of their turnover requirements and the services they offer. . There are a number of factoring brokers that will negotiate on your behalf. They may not charge you as they will receive commission from the factoring company. Recommendations Factoring companies should be willing to let you talk to some of their customers. The best recommendation of all is one from someone that you know and trust. General reputation is also important. Questions to ask •

What is the factor's record in collecting debts quickly and efficiently?

•

How exactly does the factor operate? What are the procedures in detail and do they suit you?

•

How does the factor handle disputes and queries?

•

As the factor will become an 'insider' and be in frequent contact with you and your staff, do you

see eye-to-eye on issues that are key to your business? Do you have a good initial rapport? •

Does the factor have experience of your industry?

•

How is the factor likely to communicate with your customers? Can you be sure that they will

not alienate them and lose your hard-earned business? •

What will happen if a customer goes over the credit limit?

•

What happens if you want to end the agreement? What period of notice must you give? 22 | P a g e

Chapter 8 Advantages and disadvantages of factoring

23 | P a g e

Advantages and disadvantages of factoring There are numerous advantages to debt factoring, but also some potential drawbacks. Advantages Factoring provides a large and quick boost to cash flow. This may be very valuable for businesses that are short of working capital. A business that is owed £500,000 may be able to get £400,000 or more in just a few days. Other advantages: •

there are many factoring companies, so prices are usually competitive

•

it can be a cost-effective way of outsourcing your sales ledger while freeing up your time to

manage the business •

it assists smoother cash flow and financial planning

•

some customers may respect factors and pay more quickly

•

you may be given useful information about the credit standing of your customers and they can

help you to negotiate better terms with your suppliers •

factors can prove an excellent strategic as well as financial resource when planning business

growth •

you will be protected from bad debts if you choose non-recourse factoring cash is released as

soon as orders are invoiced and is available for capital investment and funding of your next orders

24 | P a g e

Disadvantages Queries and disputes may have to be referred on. For this reason, factoring works best when a business is efficient and there are few disputes and queries. Other disadvantages: •

The cost will mean a reduction in your profit margin on each order or service fulfilment.

•

It may reduce the scope for borrowing - book debts will not be available as security.

•

Factors may want to vet your customers and influence the way that you do business.

•

It may be difficult to end an arrangement with a factor as you will have to pay off any money

they have advanced you on invoices if the customer has not paid them yet. •

Some customers may prefer to deal directly with you.

•

How the factor deals with your customers will affect what your customers think of you. Make

sure you use a reputable company that will not damage your reputation. •

You have to pay extra to remove your liability for bad debtors.

25 | P a g e

Chapter 9 What makes a business suitable for factoring?

26 | P a g e

What makes a business suitable for factoring? Factors' requirements vary, so what follows is an indication and not a rigid list. You may find a factor even if the following criteria are not met. What makes a business suitable for factoring? Your business may be suitable for factoring if it has: •

an annual turnover of at least £50,000, although some factors will consider start-ups and smaller

businesses •

more than just a few customers

•

no single customer accounts for more than about a third of turnover

•

customers that accept the standard payment terms for the industry

•

customers that accept a reasonable period of credit

What makes a business unsuitable for factoring? Your business may not be suitable for factoring if it: •

sells to the public - factoring is only available for sales to commercial customers

•

has too many small invoices

•

has too many disputes and queries

•

is not a sound, reputable and trustworthy business

•

has customers that make part payments or stage payments

27 | P a g e

Chapter 10 Factoring in India

28 | P a g e

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.

29 | P a g e

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 varies 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).

30 | P a g e

Chapter 11 Types of Factoring

31 | P a g e

Types of Factoring 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. 32 | P a g e

Chapter 12 Factoring companies in India

33 | P a g e

Factoring companies in India Canbank Factors Limited SBI Factors and Commercial Services Pvt. Ltd The Hongkong and Shanghai Banking Corporation Ltd Foremost Factors Limited Global Trade Finance Limited Export Credit Guarantee Corporation of India Ltd Citibank NA, India Small Industries Development Bank of India (SIDBI) Standard Chartered Bank

34 | P a g e

Canbank Factors Limited

35 | P a g e

Canbank Factors Limited About Canbank •

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, an 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. It is 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. The 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.

36 | P a g e

Factoring is a powerful financial instrument specially designed to meet the post sales working capital requirements of the Industrial, Trade & Service sectors. It is a portfolio of complementary financial services. Besides financing up to 80% of the invoice value, the package includes

a) Sales Ledger administration b) Debt Collection services c) Credit Information services d) Advisory services

DOMESTIC FACTORING: With-recourse factoring is the service presently offered by them. Under this category, besides finance against the receivables at the agreed percentage, collection of receivables and maintenance of sales ledger are undertaken. The client's customers are notified of their interest in the factored debt and the customers give an undertaking to pay the value of the debt to tem directly on the due date. They do not assume the credit risk of debts. In case the customer does not pay the debts on maturity, they will have recourse against the client to recover the amount paid.

UNDISCLOSED FACTORING:

Undisclosed factoring is another variant of factoring where the customers of their clients are not notified of the factoring arrangement. This category of facility is considered depending on the merits of the proposal, at their discretion. In this type of factoring, maintenance of sales ledger and collection of debt are undertaken by the client himself. The client undertakes to pay the value of the debts factored on the due dates irrespective of the fact whether the customer has paid the debts or not. This facility is considered on a selective basis only. 37 | P a g e

Benefits of Factoring Clients have instant access to their earnings and with the cash flow working smoothly; they can promptly settle their creditors, avail cash discounts and improve their profits. Sales ledger of the client is maintained by them on computer and provided every month. They send monthly statements and reminders to the customers. As they attend to the task of collecting the debt, clients can concentrate on building their business by attending to other important management functions such as planning, production and marketing. Formalities with them are very simple and hassle free. Their quickness and flexibility in decision making will make clients feel comfortable in dealing with them.

38 | P a g e

39 | P a g e

SBI Factors

40 | P a g e

SBI Factors How it works



You invoice your customer in the usual way-only adding a notification that the invoice is assigned to and must be paid to SBI FACTORS.



You submit copies of invoices to SBI FACTORS, accompanied by the receipted delivery challan or any other valid proof of dispatch.



SBI FACTORS will provide pre-payment up to 80% of the invoice value.



Follows up with the customer for realization of payment due.



Balance payment made immediately on realization.



To keep you informed of the factored invoices, SBI FACTORS will send you monthly statement of account.

SBI Factor offers: •

Instant Cash

•

Follow up and Speedy Collection

•

MIS Services

•

Sales Ledger Administration.

•

Credit Protection.

•

Advisory Services.

41 | P a g e

Cost of Factoring Finance charge Finance charge is computed on the pre-payment outstanding in your account at monthly intervals. Factoring can be cheap source of funds, provided you organize your drawals from them. Service Charge / Handling Charge Service/Handling charge is a nominal charge levied to cover the cost of services viz. collection, sales ledger management and periodical MIS reports. It ranges from 0.1% to 0.2% on the total value of invoices factored/ collected by them. The tax payable on Service/Handling charges is also recovered from clients.

Benefits For You 1. You will have ready cash even from your credit sales. 2. You will have substantial funds-up to 80% of the factored invoices. It is much more than bank finance against credit sales. (Further increase is possible in exceptional cases.) 3. You will be able to offer competitive terms to your buyers and improve your sales and ultimately profit. 4. With cash available for credit sales, your liquidity will improve and therefore, your production cycle will be accelerated. 5. Appraisal and documentation procedures are made simple and response time is very small. 6. Cash disbursals are instantaneous. 7. Factoring provides you much more than bill discounting, like finance, collection, sales ledger administration, etc. 8. You do not have to submit any periodical statements. On the contrary, we provide you with classified periodical statement of outstanding invoices. 42 | P a g e

9. They offer favorable credit period with liberal grace periods. 10. They require only minimum-security formalities for this service provided to you. 11. Factoring replaces high cost market credit and enables purchases on cash basis availing cash discounts 12. Each invoice is followed up for payment. 13. Faster collection through SBI FAST. 14. Lowest response time. For Your Customers (Your Buyers) 1. Customers get adequate credit period for payment of assigned debts. 2. Factoring will facilitate their credit purchases. 3. Customers save on high bank charges and expenses. 4. No Documentation except acknowledgement of the Notification letter (Customers undertaking to make payment of the invoices to the factor) 5. Factors furnish the customers with periodical statement of outstanding invoices factored on them. 6. Factoring does not impinge on their rights vis-a-vis the supplier in respect of quality of goods, contractual obligations, etc. 7. Customers located in other centers can make payment directly to us through our CMP module with SBI. For Your Bankers 1. Factoring is not a threat to banking; it is a financial service complementary to that of the banks. 2. Factoring improves liquidity of your borrowers. 3. Credit sales are closely monitored by the Factor and proceeds are routed through the clients’ accounts with the bank. 43 | P a g e

4. Factoring improves the quality of advances of banks.

Export Factoring Under Export Factoring, they factor export invoices drawn on overseas buyers and prepay to clients an agreed percentage of the invoice value immediately. They are members of FCI which has 188 members spread over 50 countries around the world. 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.

Benefits to Exporters •

Elimination of the cost and delays experienced in transacting business under LC

•

The import factor offers credit risk protection in case buyer does not pay invoices with in 90 days of due date.

•

ECGC policy cost can be saved. There is reduction is administrative cost as the exporter will be dealing with only one Export Factor irrespective of the number of countries involved.

•

The exporter can obtain valuable information on the standing of the foreign buyers on trade customs and market potential in order to expand his business.

44 | P a g e

•

The following up of receivables by import factor will speed up the collections.

•

As they provide finance up to 90% on export invoices, the exporter has an improved cash flow and his liquidity improves markedly.

Benefits to Importers •

He can pay invoices in the country locally.

•

He deals with the local agency, i.e. the Import Factor.

•

Minimum documentation required.

•

The cost of Letters of Credit and delay on account of LC’s are eliminated. All communication is in his own language.

ADVANTAGES OF EXPORT FACTORING VIS-À-VIS OTHER PAYMENT OPTIONS There are other payment options such as Letter of Credit, Documents against Acceptance (DA), Documents against payment (DP) and Advance payments. However all these options have shortcomings such as the cost and delay involved in LC’s , no guaranteed payment in respect of DA bill and buyer not being able to satisfy himself on the quality of products before making payments in respect of DP bill. The two-factor system provides collection services and credit protection and also credit facilities to buyers on open account terms. Thus this system is superior compared to other payment options available to an exporter. Domestic Factoring Bill 2 cash (Receivables Factoring Facility): Bill 2 Cash is a domestic factoring facility offered by them 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 them. This facility can be “With recourse” or “Non recourse”

45 | P a g e

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 them 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 delivery. Import Factoring Import Factoring is a special financial service that enables buyers / importers to purchase the goods from foreign suppliers on credit without Letter of Credit or Bank Guarantee i.e. on open account terms. The Importers can buy goods as usual but are obliged to pay the invoice amount due to our account and not to the exporter. Import Factoring is an alternative to the business practice under Letter of Credit. As an Import Factor, SBI Factors & Commercial Services Pvt. Ltd. (SBI Factors) will assume the credit risk on evaluation of the importer and provide the credit cover to the Export Factor. The cost in this regard has to be born by the exporter through the Import Factor. Import Factor (herein SBI Factors) undertakes to pay the Export Factor under guarantee, in case, the approved account receivables remain unpaid 90 days past due. Import Factor does not cover the credit risk in case of commercial dispute arises amongst the exporter and the importer or the importer declared as insolvent.

46 | P a g e

The business transactions under import factoring usually takes place under two-factor platform. The relationship usually starts with an exchange of letter between the importer and the exporter in terms of which the terms & conditions of the proposed sale are agreed upon. The exporter then ties up with an Export Factor who obtains a suitable credit cover from an import factor. The deal is sealed with the exporter addressing a letter of introduction (LOI) to the importer introducing the export factor and the import factor to the later authorizing the importer to route all payments relating to the transaction through the import factor.

47 | P a g e

HSBC

48 | P a g e

HSBC Factoring Services 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. 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.

49 | P a g e

Distributor Finance 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.

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 turn forwards this request to an Import Factor in the Importer's country. 3. The Import Factor evaluates the Importer and conveys its approval to the Export Factor who in turn conveys commencement of the Factoring arrangement to the Exporter.

50 | P a g e

4. The exporter delivers the goods to the importer. Exporter produces the documents to the Export Factor. 5. The Export Factor disburses funds to the Exporter up to the prepayment amount decided and at the same time he forwards the documents to the Import factor and the Importer. 6. On the due date of the invoice, the Importer pays the Import Factor, who in turn remits this payment to the Export Factor. 7. The Export Factor applies the received funds to the outstanding amount of the advance against 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.

51 | P a g e

Bibliography www.canbankfactors.com www.sbifactors.com www.hsbc.co.in www.wikipedia.com www.businesslink.gov.uk

52 | P a g e