Receivables Management
Factoring
Meaning of Factoring
Provision of working capital finance through
financing of receivables by a factor is called
factoring .
A Factor is a financial institution which renders
services relating to management and financing of
sundry debtors that arises form credit sales.
Features of Factoring
Factor selects the accounts receivables of his
client and sets up a credit limit for each account
receivable depending upon safety, financial
stability and credit worthiness.
Factor takes the responsibility of collecting the
accounts receivables selected by it .
Factor advances money to the client against
selected accounts that may be not yet collected or
due debts.( 70 – 80%)
Factor charges interest on advances that is
usually equal to or slightly higher than lending rate
of commercial banks.
Modified recourse
factoring
Undisclosed
Recourse Factoring factoring
Bulk factoring
Notified factoring
TYPES OF FACTORING
Domestic factoring
International factoring
Non Recourse
factoring
Export Factoring
Import Factoring
Recourse factoring
- factor provides all types of facilities except debt
protection
- factor has a recourse to the seller of receivables
- factor client (seller ) is responsible for ant bad
debts incurred.
- common type of factoring – difficult to obtain info
of buyer and cost of bad debt protection is high.
- beneficial to both the parties – less expensive
and less risky for factor.
Non Recourse factoring
- also called old line factoring, full service factoring
- factor offers all the types of services – provides
finance , administer sales ledger , collection of
debts , advisory services and debt protection.
- the factor has no recourse to the client in case of
non payment by the customers - factor has to
absorb the debts himself.
- assumes more risk – more costly
Modified recourse factoring
- factor offers debt protection to the client only if
the customer fails to pay the invoice due to
financial failure or bankruptcy.
- no debt protection if client refuses to pay due to
issues related to quality , delivery etc
Undisclosed factoring
- factoring arrangement is not disclosed to the
customer .
- customer is not aware of factoring arrangement
and pays the invoice directly to the client .
- available in UK to finance financially strong
companies - also known as open account
receivables.
Bulk Factoring
- under this arrangement the client (seller)
maintains the sales ledger on behalf of factor –
company should have good credit management
system and which needs finance.
- also known as In- house factoring or Agencies
factoring .
Notified factoring
- buyer ( customer / debtor) is informed that the
debts has been purchased and they are
requested to pay to the factor directly.
Domestic factoring
- factoring arrangement where all the three parties
, the factor, client and buyer are residing in the
same country, and are subject to the laws of the
country
International factoring
- is a factoring arrangement where the seller and
the buyer are residing in two different countries.
- involves cooperation - between two factoring
companies – sellers country (export factor) and
buyers country (import factor)
Export factoring
- arrangement in which domestic
companies(exporters) use factoring services in
the same country.
- factor is located in the sellers country – to
provide continuous services
Import factoring
- arrangement where seller (exporter) uses the
factor services in the other country.
- factor is located in the buyer country.
Costs of factoring
- Factor charges a nominal charge(interest) which
ranges form 1 – 2% of the total value of
receivables (invoices) factored by the factor .
- Factor also collects service tax payable on
services rendered from the clients.
Benefits of Factoring
1) For the companies
- ready cash even before collection of sales
- substantial funds upto 80% of the factored
invoices which is more than bank finance
- able to offer competitive terms to buyers and
improve sale and profit.
- liquidity will improve and the production cycle will
be accelerated
- Saves time because the company need not
follow up the customer for credit collection.
- replaces high cost of market credit
- factors provide classified periodical statement of
outstanding invoices .
- factoring provides much more than just bill
discounting – financing , collection, sales ledger
administration.
2) For the buyer
- Facilitates credit purchases
- savings on high bank charges and expenses
- no documentation except acknowledgment of
the notification letter ( customer undertaking to
make payment of invoices to the factor)
- receive periodical statement of the outstanding
invoices .
