Factoring ppt 2003 (1)

PRESENTED BY- ASHEESH PRATIMA PRIYANKA DEVKARAN PRACHINIT BHOPAL (MBA 2009-11)

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.

A study group appointed

INTERNATIONAL INSTITUTE for the Unification of Private Law (UNIDROIT) ROME 1988 defines:-

“factoring means an arrangement between a factor and his client which includes at least two of the following services to be provided by the factor-

1) Finance2) Maintenance of accounts 3) Collection of debts4) Protection against credit risk

WHY A FIRM USE FACTORING

Factoring is used by a firm 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. 

PARTIES INVOLVED IN FACTORING

Client customer

factor

BuyerSeller

Financer

buys invoices

collection

SERVICES OFFERED BY A FACTORa) Follow-up and collection of Receivables from

Clients.b) Purchase of Receivables with or without

recourse.c) Help in getting information and credit line on

customers (credit protection) d) Sorting out disputes , due to his relationship

with Buyer & Seller.

PROCESS INVOLVED IN FACTORINGa) Client concludes a credit sale with a customer.

b) Client sells the customer’s account to the Factor and notifies the customer.

c) Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance.

d) Factor maintains the customer’s account and follows up for payment.

e) Customer remits the amount due to the Factor.f) Factor makes the final payment to the Client when the

account is collected or on the guaranteed payment date.

MECHANICS OF FACTORING

a) 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).

b) The Client (Seller) submits invoice copy only with Delivery Challan showing receipt of goods by buyer, to the Factor.

c) The Factor, after scrutiny of these papers, allows payment (,usually up to 80% of invoice value). The balance is retained as Retention Money (Margin Money). This is also called Factor Reserve.

a) The drawing limit is adjusted on a continuous basis after taking into account the collection of Factored Debts.

b) Once the invoice is honored by the buyer on due date, the Retention Money credited to the Client’s Account.

c) Till the payment of bills, the Factor follows up the payment and sends regular statements to the Client.

CHARGES FOR FACTORING SERVICESa) Factor charges Commission (as a flat percentage of value

of Debts purchased) (0. 5 0% to 1. 5 0%)

b) Commission is collected up-front.

c) For making immediate part payment, interest charged. Interest is higher than rate of interest charged on Working Capital Finance by Banks.

d) If interest is charged up-front, it is called discount.

TYPES OF FACTORING

a) Recourse Factoring.

b) Non-recourse Factoring.

c) Maturity Factoring.

d) Cross-border Factoring.

RECOURSE FACTORING

a) Up to 75 % to 85 % of the Invoice Receivable is factored.

b) Interest is charged from the date of advance to the date of collection.

c) Factor purchases Receivables on the condition that loss arising on account of non-recovery will be borne by the Client.

d) Credit Risk is with the Client.e) Factor does not participate in the credit sanction

process.f) In India, factoring is done with recourse.

NON-RECOURSE FACTORING

a) Factor purchases Receivables on the condition that the Factor has no recourse to the Client, if the debt turns out to be non-recoverable.

b) Credit risk is with the Factor.

c) Higher commission is charged.

d) Factor participates in credit sanction process and approves credit limit given by the Client to the Customer.

e) In USA/UK, factoring is commonly done without recourse.

MATURITY FACTORING

a) Factor does not make any advance payment to the Client.

b) Pays on guaranteed payment date or on collection of Receivables.

c) Guaranteed payment date is usually fixed taking into account previous collection experience of the Client.

d) Nominal Commission is charged.

e) No risk to Factor.

CROSS - BORDER FACTORINGa) It is similar to domestic factoring except that there are

four parties, viz., b) a) Exporter,c) b) Export Factor,d) c) Import Factor, ande) d) Importer.

f) It is also called two-factor system of factoring.g) 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.

EMINENCES OF FACTORING

Factoring provides a large and quick boost to cash flow.

Many factoring companies, so prices are usually competitive.

Assists smoother cash flow and financial planning. Protected from bad debts ( non-recourse factoring)

DETRIMENTS OF FACTORING

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

Factors will restrict funding against poor quality debtors or poor debtor spread, so you will need to manage these funding fluctuations.

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.

contd…..

Some customers may prefer to deal directly with you.

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

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

A BUSINESS SUITABLE FOR FACTORING

a) An annual turnover of at least $1 million , but some factors can also consider start-ups and smaller businesses.

b) The number of customers should be sufficient.

c) No single customer accounts for more than about a third of turnover

d) Customers that accept the standard payment terms for the industry

e) Customers that accept a reasonable period of credit

INDUSTRIES USE ITa) Transportation

b) Medical

c) Janitorial(the maintenance or cleaning of a building)

d) Staffing

e) Construction

f) Manufacturing

g) Service

FACTORING IN INDIA

a) Kalyana Sundaram Committee recommended introduction of factoring in 1989.

b) Banking Regulation Act, 1949, was amended in 1991 for Banks setting up factoring services.

c) SBI/ Canara Bank have set up their Factoring Subsidiaries:-

d) SBI Factors Ltd., (April, 1991) ( an asset base of Rs 1908.00 corers as on March 31, 2008, highest in India)

e) Canara Bank Factors Ltd., (August, 1991).f) RBI has permitted Banks to undertake factoring

services through subsidiaries.

REASONS FACTORING HAS NOT BECOME POPULAR IN INDIAa) Banks’ reluctance to provide factoring services

b) Bank’s resistance to issue Letter of Disclaimer (Letter of Disclaimer is mandatory as per RBI Guidelines).

c) Problems in recovery.

d) Factoring requires assignment of debt which attracts Stamp Duty.

e) Cost of transaction becomes high.

"Hongkong and Shanghai Banking Corporation Limited“(HSBC) 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.

Its factoring services offer a comprehensive receivables and payables management solution which includes transaction financing, credit protection, sales ledger administration and payment collection.

  HSBC has dedicated Relationship Managers to provide any assistance that may require with respect to business

and trade needs. 

HSBC currently offers both domestic and international factoring products.

Domestic Factoring

Through this product, HSBC intention is to be an active partner in the management of company's supply/delivery chain. Through domestic factoring, It could look at financing company’s receivables from company’s buyers. Additionally HSBC also undertake to finance company’s vendor/supplier

payments.

Contd…..

Receivables Finance can be structured with on a With Recourse Basis (where HSBC would be setting up lines on company) or on a Without Recourse Basis.

Payments of all company service and utility bills could be done through HSBC’s 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.

INTERNATIONAL FACTORING

Step Guide to International Factoring:

The importer places the order for purchase of goods with the exporter.

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.

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.

The exporter delivers the goods to the importer. Exporter produces the documents to the Export Factor. The Export Factor disburses funds to the Exporter up to the

prepayment amount decided and at the same time the forwards the documents to the Import factor and the Importer.

On the due date of the invoice, the Importer pays the Import Factor, who in turn remits this payment to the Export Factor.

The Export Factor applies the received funds to the outstanding amount of the advance against the invoice. The exporter receives the balance payment

PROFITS FOR HSBC

Increase in goodwill Earns through factoring Sharp rise in customers number Becoming international brand