The receivables constitute a significant portion of current assets of a firm. But, for investment in receivables, a firm has to incur certain costs such as costs of financing the receivables and costs of collection from the receivables. Further there is a risk of bad debts also.
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Factoring:
- The receivables constitute a significant portion of current assets of a firm
- But, for investment in receivables, a firm has to incur certain costs such as costs of
financing the receivables and costs of
collection from the receivables
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Factoring:
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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
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Factoring:
* Factoring may broadly be defined as the relationship created by an agreement
between the seller of goods / services and a financial institution, called the factor
* Factoring may also be defined asa continuous relationship between a
financial institution ( the factor) anda
business concern selling goods / service
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Factoring:
- The term factoring has been defined In various countries in different ways due to
non-availability of any uniform codified law - Factoring means an arrangement between
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Factoring:
1 Finance for the supplier including loans and advance payments
2 Maintenance of accounts, ledgers relating to receivables
3 Collection of debts
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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
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Features of Factoring:
4 Factor acts as another financial
Intermediary between the buyer and the
seller
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Mechanism of Factoring:
- The factoring business is generated by
credit sales in the normal course of business
* The main function of factor Is realization of sales Once the transaction takes place,
the role of a factor steps in to realize the sale / collect receivables
‘ Thus, the factor acts as an intermediary
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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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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
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Parties to the Factoring — The Buyer
1 Enters into an agreement with the seller and negotiates the terms and conditions for the purchase of goods on credit
Takes the delivery of the goods along
with the invoice bill and instructions from the seller to make payments to the factor on due date
Will make payments to the factor In time
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Parties to the Factoring — The seller
1 Enters into contract for the sale of goods on credit as per the purchase order sent by the buyer stating various terms and conditions
Sends copies of invoice, and delivery
challan along with the goods to the buyer and gives instructions to the buyer to
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Parties to the Factoring — The Seller
3 Sells the receivables received from the buyer to a factor and receives 80% or more of the payment in advance
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Parties to the Factoring — The Factor
1 Enters into an agreement with the seller for rendering factor services, L.e
collection of receivable / debts
Pay 8-% or more of the amount of receivables
Sends copies of sale documents
Receives payments from the buyer on
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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
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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
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Types of Factoring:
Selected seller based factoring 8 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
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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