After studying this chapter you will be able to understand: Financial services, factoring, mechanism of factoring, types of factoring, advance and maturity factoring, functions of a factor, venture capital,...
Trang 6Financial services
Features of Factoring:
4 Factor acts as another financial
Intermediary between the buyer and the seller
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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
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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
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Types of Factoring:
However, the following are some of the important types of factoring
arrangements;
1 Recourse and non-recourse factoring 2 Advance and maturity factoring
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Types of Factoring:
6 Selected seller based factoring 7 Selected buyer based factoring
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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 14Financial 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
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Types of Factoring:
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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 17- Disclosed and undisclosed
Trang 18Financial 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
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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
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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 /
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Trang 24Financial services
- Venture capital has been emerged as a new financial method of financing during the 20th century
- Itis the capital provided by firms of professionals who invest alongside
management in young, rapidly growing or changing companies that have the
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* Itis a form of equity financing especially designed for funding high-risk and high- reward projects
- There is acommon perception that
venture capital is a means of financing high technology projects
- The term ‘venture capital’ represents financial investment in a highly risky
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- Ayoung, high tech company that Is in the early stage of financing and Is not yet
ready to make a public offer of securities may seek venture capital
* Such a high risk capital is provided by
venture capital funds in the form of long- term equity finance with the hope of
earning a high rate of return primarily in the form of capital gain
Trang 28Features of venture capital
- The main features of VC can be Summarized as:
High degree of risk:
Trang 29Features of venture capital
Equity participation:
- VC financing Is, invariably, an actual or potential equity participation wherein the objective of the VC Is to make capital gain by selling the shares once the firm
Trang 30Features of venture capital
Long-term investment:
‘ VC financing is a long-term investment It generally takes a long period to encash the investment in securities made by
Trang 31Features of venture capital
Participation in management:
* In addition to providing capital, VC funds take an active interest in the management of the assisted firm
Trang 32Features of venture capital
- Itis also different from that of a ordinary
stock market investor who merely trades in the shares of a company without
participating in their management * It has been rightly said,
Trang 33Features of venture capital
Investment is liquid:
- AVC Is not subject to repayment on
demand as with an overdraft or following a loan repayment schedule
- The investment Is realized only when the company Is sold or achieves a stock
Trang 35Modes of VC finance
Venture capitalists provide funds for long- term in any of the following modes;
Equity:
‘ Most of the venture capital funds provide financial support to entrepreneurs in the
form of equity by financing 49% of the total equity
- This is to ensure that the ownership and the overall control remain with the
Trang 36Modes of VC finance Conditional loan:
‘ From a venture capitalist’s point of view, equity is an unsecured Instrument and hence a less preferable option thana secured debt instrument
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Convertible loans:
- The convertible loan is subordinate to all
Trang 39Areas of Investment
‘ Different venture groups prefer different types of Investments
- Some specialize in seed capital and early expansion while other focus on exit
financing
- Biotechnology, medical services,
communications, electronic components and software companies seem to be
attracting the most attention from venture
Trang 40Areas of Investment
- The venture capital firms finance both early and later stage investments to maintain a balance between risk and profitability
- The venture capitalists usually take into
Trang 41Areas of Investment
strong management team
A viable idea Business plan
Project cost and return Future market prospects Existing technology