FACTORING

MEANING
 The word factor has been derived from the Latin
word ‘Facere’ which means ‘ to make or to do’.
 Factoring is a method of financing whereby a
company sells its trade debts at a discount to a financial
institution.
 It is a continuous arrangement between a Financial
Institution (FACTOR) , and a company (CLIENT) .
 The client is immediately paid 80% of the trade
debts taken over by the factor and when the customers
repay their dues, the factor will make the balance 20%
payment.
 DEFINITION
V.A.AVADHANI
“ Factoring is a service of financial nature
involving the conversion of credit bills into cash”.

MODUS OPERANDI
Factoring is an arrangement between client and factor.
The client prepares the invoices the usual way on
selling goods to customers and the goods are sent to
the customer.
The client hands over the invoices to the factor .
The factor makes immediate payment of 80% of the
invoices and balance on the realisation of the debts.
The trade customers are advised to pay the amount
due to the client to the factor.
Functions of Factor

Maintenance of Sales Ledger

A factor is responsible for maintaining the sales
ledger of the client. So the factor takes care of all the
sales transactions of the client.
Financing
The factor finances the client by purchasing all the
account receivables.
Credit Protection
In the case of non-recourse factoring, the risk of non-
payment or bad debts is on the factor.
Collection of Money
The factor performs the duty of collecting funds from
the client’s debtors. This enables the client to focus
on core areas of business instead of putting energies
in the collection of money.
 TYPES OF FACTORING
Recourse and Non-recourse Factoring:
•In this type of arrangement, the financial
institution, can resort to the firm, when the debts
are not recoverable.
•So, the credit risk associated with the trade
debts are not assumed by the factor.
•On the other hand, in non-recourse factoring,
the factor cannot recourse to the firm, in case the
debt turn out to be irrecoverable.
 TYPES Contd.,
Disclosed and Undisclosed Factoring:
•The factoring in which the factor’s
name is indicated in the invoice by
the supplier of the goods or services
asking the purchaser to pay the factor, is
called disclosed factoring.
•Conversely, the form of factoring in
which the name of the factor is not
mentioned in the invoice issued by the
manufacturer. In such a case, the factor
maintains sales ledger of the client and
the debt is realized in the name of the
firm. However, the control is in the hands
of the factor.
 TYPES Contd.,
Domestic and Export Factoring:
• When the three parties to factoring, i.e.
customer, client, and factor, reside in the same
country, then this is called as domestic
factoring.
•Export factoring, or otherwise known as cross-
border factoring is one in which there are four
parties involved, i.e. exporter (client), the
importer (customer), export factor and import
factor. This is also termed as the two-factor
system.
 TYPES Contd.,
Advance and Maturity Factoring:
• In advance factoring, the factor gives an
advance to the client, against the uncollected
receivables.
•In maturity factoring, the factoring agency
does not provide any advance to the firm.
Instead, the bank collects the sum from the
customer and pays to the firm, either on the
date on which the amount is collected from the
customers or on a guaranteed payment date.
 ADVANTAGES OF
FACTORING
FINANCIAL SERVICE
Clients will be able to convert their trade debts into
cash up to 80% immediately as soon as the sales are over.
They need not wait for months together to get cash for
recycling.
COLLECTION SERVICE
Collection work is completely taken up by the factoring
organisation, leaving the client to concentrate on
production.
CREDIT RISK SERVICE
The factor assumes the entire risk of default in
payment by customers and thus, the client is assured of
complete realisation of the book debts.
 ADVANTAGES CONTD.,
EXPERTISED SALES LEDGER SERVICE
The client receives services like maintenance of
accounting records, monthly sales analysis, overdue invoice
analysis and customer payment statement from the factor.
The factor also maintains contact with the customer to
ensure that they repay their dues promptly.
Thus it is the duty of the factor to take care of all the
functions relating to the maintenance of sales ledger of the
client.
CONSULTANCY SERVICE
Factors are professionals in offering management services .
They collect information regarding credit worthiness of the
customers, ascertain their track record, quality of the portfolio
turnover, average size of the inventory etc.,.
They also advice their clients on important financial
matters.
 ADVANTAGES Contd.,
TRADE BENEFITS
Factoring enables the client to offer longer credit
facilities to their customers and thus to attract
more business.
It helps the client to concentrate on production
and materials management without bothering
about financial management.
MISCELLANEOUS SERVICE
-Render prompt service at reasonable rates.
-Build bigger credit library of debtors by means
of collecting information about new debtors.
-Efficient follow up of collection.
-Computerised sales ledger maintenance.
 DISADVANTAGES OF
FACTORING

• Itcould prove costlier to the management of

receivables. Large firms have access to similar
sources of funds like factoring, and they have
well-organised credit and receivable
management. Hence there is no need for
factoring services.
• It is perceived to be
finance of last resort as it
is an expensive form of financing.
 FORFAITING
MEANING
• The term ‘forfait’ is a French word meaning
‘to give something' or ‘to give up one’s right’.
• The exporter gives up his right to receive
payments in future under an export bill for
immediate cash payments by the forfaitor.
• The right to receive the payment on the
due date passes on to the forfaitor .
• The exporter is able to get 100% of the
amount of the bill minus the discount charges
immediately and get the benefits of cash sales.
 DEFINITION

• “The non-recourse purchase by a bank or

any other financial institution, of
receivables arising from an export of
goods and services”
 FACTORING Vs
FORFAITING
Factoring is used for short
term financing.
It is employed to finance Forfaiting is for medium
both domestic and export term financing .
business. It is invariably employed
It is the purchase of the in export business only.
invoice of the client. It is the purchase of
It includes the export bill
administration of sales
ledger, assumption of credit It mainly concentrates
risk, recovery of debts and on financing aspects only,
consultancy services. in respect of export bill.
The client is able to get only 100% of the export bill is
80% of the total invoice as given as credit under
credit facility. forfaiting.
 DISTINCTION Contd.,

It is done with or without It is done without

recourse to the client. recourse to the client.
The invoices cannot be The bill can be sold in
sold in the secondary the secondary market or
market by the factor. to any investor for cash.
Factoring is based on It is specific one that it
‘whole turnover i.e.,bulk is based on a single
finance is provided export bill arising out of
against a number of an individual transaction
unpaid invoices. only.
BENEFITS OF FORFAITING
PROFITABLE AND LIQUID
For the forfaitor he gets immediate income in the form
of discount charges, but can also sell them in the
secondary market.
SIMPLE AND FLEXIBLE
It can be adopted to any export transaction and the
exact structure of finance can also be determined
according to the needs of the exporter, importer and the
forfaitor.
AVOIDS EXPORT CREDIT RISK
The exporter is completely free from many export credit
risks .
CONFIDENTIAL AND SPEEDY
International trade can take place very quickly through a
forfaitor.
It does not involve much documentary procedures.
 ADVANTAGES Contd.,

SUITABLE FOR ALL KINDS OF EXPORT DEAL

It is suitable for all kinds of goods---capital
goods or commodity exports.
CENT PERCENT FINANCING
The exporter is able to convert his deferred
transactions into cash transaction.
FIXED RATE FINANCE
It provides finance always at a fixed rate
only.
 DISADVANTAGES

• Non-availability for short and long periods.

• Non-availability for financially weak countries.
• Dominance of Western Currencies.
• Difficulty in procuring International Bank’s
Guarantee.