Factoring & Forfaiting..

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Presentation On

Factoring & ForfeitingBy:-

Harshil Shah 82

Meet Sanghavi 77

Bijal Shah 88

Dhara Chauhan 15

Dhara Zala 121

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Why we need Factoring?

For Smooth cash flow

For meeting working capital needs

Overcome the situation from high cost of capital and reduced profit

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Factoring Services - Concept

Definition: Factoring is defined as ‘a continuing legal

relationship between a financial institution (the factor) and a business concern (the client), selling goods or providing services to trade customers (the customers) on open account basis whereby the Factor purchases the client’s book debts (accounts receivables) either with or without recourse to the client and in relation thereto controls the credit extended to customers and administers the sales ledgers’.

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Factoring functions..

It is purchasing & collection the client’s a/c’s receivables (with or without recourse),

Sales Ledger management Credit investigation & undertaking of

risks Provision of finance against debts Rendering consultancy services

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Factoring Services - Concept

Client Customer

Factor

Order placed

Deliver of goods

Client submits invoice

Factor-Prepayment

Monthly statements

Customer pays

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Funding Process

Fax the copy of invoice to factor Factor processes the invoice Get up to 80% of the invoice in 24 hours 20% kept in reserve account Factor receives the payment from customer Factor deducts fee from reserve account Factor forwards the balance from reserve

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Types of Factoring Services

Full Service factoring or w/o recourse factoring Standard Factoring Factor Assumes Credit Risk

With Recourse Factoring Factor does not assume credit risk If debtors not paid, clients have to take the work

for collection

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Maturity Factoring Collection Factoring Paid to clients only when factor gets money

Bulk Factoring Disclosed Factoring Provides Finance after disclosing the fact of

assignments

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Invoice Factoring Only provides finance against invoices All other works have to be done by clients

Agency Factoring Factor and Client share the work The Factor has to provide finance and assume

risk

International Factoring Done with exporters Facilitated with the help of export factor and

import factor

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Two-Factor System of Factoring There are usually four parties to a cross-

border factoring transactions Exporter (client) Importer (customer) Export Factor Import Factor

Two factor system results in two separate but inter-linked agreements Between exporter and export factor Between export factor import factor

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Two-Factor System of Factoring Functions of factors are divided between

export factor and import factor Import factor provides a link between export

factor and the importer and serves to solve the international barriers like language problem, legal formalities and so on. He also underwrites customer trade credit risks, collects receivables and transfers funds to the export factor in the currency of the invoice

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Exporter Importer

Country A Country B

Export Factor Import Factor

Goods and invoices – Stage I

Copy Invoice Stage II

Prepayments Stage III

Copy Invoices Stage IV

Statements Stage V

PaymentsStage VI

Payments Stage VII

Payment of Commission Stage VIII

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Benefits Of Factoring

Financial Services Collection Service ‘Credit Risk’ Service Provision of expertise ‘sales ledger management’

service Consultancy service Economy in Servicing Off-balance sheet financing Trade Benefits Miscellaneous service

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What is Forfaiting ? “Forfait” is derived from French word “a forfait”

which means forfeiting or surrender of rights It is a mechanism of financing exports

by discounting export receivables evidenced by Bills of Exchange or Promissory Notes without recourse to the seller (viz exporter) carrying medium to long term maturities on a fixed rate basis (discount) upto 100 per cent of the contract value

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Forfaiting..

It is a highly flexible technique that allows an Exporter to grant attractive credit terms to foreign Buyers, without tying up cash flow or assuming the risks of possible late payment or default. Simultaneously, the Exporter is fully protected against interest and/or currency rates moving unfavourably during the credit period

Forfaiting is a highly effective sales tool, which simultaneously improves cash-flow and eliminates risk.

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Six Parties in Forfaiting

1. Exporter (India)

2. Importer (Abroad)

3. Exporter’s Bank (India)

4. Importer’s/Avalising Bank (Abroad)

5. EXIM Bank (India )

6. Forfaiter (Abroad)

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Forfaiting : 8 Steps1. Commercial contract : Exporter & Foreign

Buyer

2. Commitment to Forfait BE , Pro Notes

3. Delivery of Goods by Exporter to Buyer

4. Delivery of BE / PN to Bank to EXIM Bk

5. Endorsement of BE / PN without recourse

6. Cash Payment/ thro’ a Nostro Account

7. Presentation of BE / PN to Buyer on maty

8. Payment of Debt Instrument on maturity

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Benefits to Exporters Converts a Deferred Payment export into a

cash transaction, improves liquidity Frees Exporter from cross-border political or

commercial risks associated Finances upto 100 percent of export value It is a “Without Recourse” finance Hedges against Interest and Exchange Risks

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Benefits to the importer

The Importer can match repayments to projected revenues, allowing for grace periods.

The Importer can obtain 100% financing, and avoid paying out cash in advance.

The Importer can pay interest on a fixed rate basis for the life of the credit, which will make budgeting simpler and safer.

The Importer can access medium to long term financing which may be prohibitively expensive or completely unavailable locally.

The Importer may be able to take advantage of export subsidy schemes which are often available from the Exporter's government.

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Drawbacks of forfaiting

Non-availability for short Periods Non-availability for financially weak countries Dominance of western currencies Difficulty in procuring international bank’s

guarantee

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DIFFERENCE BETWEEN FACTORING AND FORFAITING 1.Suitable for ongoing open

account sales, not backed by LC or accepted bills or exchange.

2. Usually provides financing for short-term credit period of upto 180 days.

1. Oriented towards single transactions backed by LC or bank guarantee.

2. Financing is usually for medium to long-term credit periods from 180 days upto 7 years though shorterm credit of 30–180 days is also available for large transactions.

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DIFFERENCE BETWEEN FACTORING AND FORFAITING3.Requires a continuous

arrangements between factor and client, whereby all sales are routed through the factor.

4. Factor assumes responsibility for collection, helps client to reduce his own overheads.

3. Seller need not route or commit other business to the forfaiter. Deals are concluded transaction-wise.

4. Forfaiter’s responsibility extends to collection of forfeited debt only. Existing financing lines remains unaffected.

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DIFFERENCE BETWEEN FACTORING AND FORFAITING5. Separate charges are

applied for —  financing—  collection—  administration—  credit protection and

—  provision of information.

5. Single discount charges is applied which depend on—  guaranteeing bank and country risk,—  credit period involved and —  currency of debt. Only additional charges is commitment fee, if firm commitment is required prior to draw down during delivery period.

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DIFFERENCE BETWEEN FACTORING AND FORFAITING6. Service is available for

domestic and export receivables.

7. Financing can be with or without recourse; the credit protection collection and administration services may also be provided without financing.

6. Usually available for export receivables only denominated in any freely convertible currency.

7. It is always ‘without recourse’ and essentially a financing product.

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List of some Forfaiters Standard Bank, London Hong Kong Bank Indo Aval ABN AMRO Bank Meghraj Financial Services Triumph International Finance India Ltd., Natwest Bank West LB + EXIM Bk + IFC : GTF, India

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Suggested websites www.forfaiting.com www.forfaiting.co.uk www.meridianfinance.com www.mezraforfaiting.com www.londonforfaiting.com www.eximbankindia.com www.ecgcindia.com www.afia-forfaiting.org www.indianexportregister.com

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Books on Forfaiting

Ref : Mezra / London Forfaiting Forfaiting for Exporters by Andy Ripley :

Amazon.com Forfaiting (1986) by Ian Guild EXIM Bank of India Booklet Indian Institute of Bankers, Mumbai Booklet NIBM, Vinimaya ICFAI – Chartered Financial Analyst

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Thanks