After studying this chapter you will be able to understand: Financial services, factoring, features of factoring, mechanism of factoring, parties to the factoring, types of factoring, advance and maturity factoring, conventional or full factoring, domestic and export factoring.
Trang 4Financial services
Factoring:
* Asmall firm may handle the problem of
receivables management of Its own, but It may not be possible for a large firm to do SO efficiently as it may be exposed to the
risk of more and more bad debts - In such a case, a firm may avail the
services of specialied institution engaged In receivables management, called
Trang 5Financial services
Factoring:
1 Finance for the supplier including loans and advance payments
2 Maintenance of accounts, ledgers relating to receivables
3 Collection of debts
Trang 7Financial services
Features of Factoring:
1 Factoring Is a service of financial nature Involving the conversion of credit bills into cash Accounts receivables, bills
recoverables and other credit dues
resulting from credit sales appear in the books of account as book credits
» The risks associated with credit are taken
over by the factor which purchases these
Trang 9Financial services
Features of Factoring:
4 Factor acts as another financial
Intermediary between the buyer and the
seller
Trang 11Financial services
Mechanism of Factoring:
- The mechanism of factoring is Summed up as the following;
An agreement Is entered into between the selling firm and the buying firm
2 The sales documents should contain the
Instructions to make payments directly to the factor who Is assigned the job of
Trang 12Financial services
Mechanism of Factoring:
3 When the payment is received by the
factor, the account of the firm is credited by the factor deducting Its fee, charges, Interest
etc as agreed upon
4 The factor may provide advance finance to the selling firm if the conditions of the
Trang 14Financial services
Parties to the Factoring
- There are basically three parties involved In a factoring transactions:
The buyer of the goods 2 The seller of the goods
3, The factor, |.e the financial institution
Trang 17Financial services
Types of Factoring:
* Anumber of factoring arrangements are possible depending upon the agreement reached between the selling firm and the factor
- The most common feature of practically all the factoring transactions Is collection of
Trang 18Financial services
Types of Factoring:
1 However, the following are some of the important types of factoring
arrangements;
Recourse and non-recourse factoring Advance and maturity factoring
Trang 19Financial services
Types of Factoring:
Selected seller based factoring 8 Selected buyer based factoring
Trang 20Financial services
Types of Factoring: Recourse & Non- recourse
* In a recourse factoring arrangement, the
factor has recourse to the client (selling
firm) if the receivables purchased turn out to be bad
‘ Let the risk of bad debt Is to be borne by
the client and the factor does not assume credit risks associated with the
Trang 21Financial services
Types of Factoring: Recourse & Non- recourse
- In the case of non-recourse factoring, the risk or loss on account of non-payment by the customers of the client Is to be borne
by the factor and he cannot claim this amount from the selling firm
- Since here he bears the risk of non-
payment, commission or fee charged for
Trang 22Financial services
Types of Factoring:
Trang 23Financial services
Advance and maturity factoring
- Under advance and maturity factoring arrangement, the factor pays only a
certain percentage (between 70% and
90%) of the receivables in advance to the client, the balance being paid on the
guaranteed payment date
- The rate of discount / interest Is determined on the basis of the
Trang 25Financial services
Conventional or full factoring
- Under this system, the factor performs
almost all services of collection of
receivables, maintenance of sales ledger,
credit collection, credit control and credit Insurance
Trang 27Financial services
Domestic and export factoring - The basic difference between the
domestic and export factoring Is on
account of the number of parties involved - In the domestic three parties are involved; 1 Customer (buyer)
2, Client (seller)
Trang 28Financial services Domestic and export factoring 1 2 3
- Export factoring is also termed as cross border / international factoring and Is
almost similar to domestic factoring except that there are four parties to the factoring transaction;
The exporter (the selling firm or client) The importer or the customer
Trang 29Financial services
Domestic and export factoring
- Since, two factors are involved in the
Trang 31Financial services
Limited factoring
- Under this, the factor discounts only
certain invoices on selective basis and
Trang 32- Selected seller based
Trang 33Financial services
Selected seller based factoring The seller sells all his accounts
receivables to the factor along with Invoice delivery challans, contracts etc after
Invoicing the customers
- The factor performs all functions of
maintaining the accounts, collecting the debts, sending reminders to the buyers - The sellers are normally approved by the
Trang 35Financial services
Selected buyer based factoring
- The factor first of all selects the buyers on the basis of their goodwill and
creditworthiness and prepares an approved list of them
- The approved buyers of a company
approach the factor for discounting their purchases of bills receivables drawn In favour of the company
Trang 36- Disclosed and undisclosed
Trang 37Financial services
Disclosed and undisclosed factoring - In disclosed factoring, the name of the
factor is mentioned in the invoice by the
Supplier telling the buyer to make payment to the factor on the due date
- However, the supplier may continue to
bear the risk of bad debts without passing it to the factor
‘ The factor assumes the risk only under
Trang 38Financial services
Disclosed and undisclosed factoring
- Under undisclosed factoring, the name of
the factor is not disclosed in the invoice But still the control lles with the factor
Trang 40Financial services Functions of a Factor
- The purchase of a book debts or
receivables Is central to the functions of factoring permitting the factor to provide the basic services such as;
1 Administration of seller’s sales ledger 2 Collection of receivables purchased 3, Provision of finance
Protection aqaainst risk of bad debts /