Factoring: Presented By

FACTORING
REDUCED DEBTS WORRIES

IMPROVED CASH FLOW
Presented by:-
Swati
jimmy
urvashi
shilpa
1
INTRODUCTION
 Concept
 Process of factoring
 Forms of factoring
 Functions of a factor
 Factoring vis-à-vis bill discounting
 Cost and Benefits
 Factoring in indian context
2
CONCEPT OF FACTORING
 Factoring is a financial option for the
management of receivables.
 Factoring, basically involves transfer of
the collection of receivables and related
bookkeeping function from the firm to a
financial intermediary called the
FACTOR.
3
In simple definition it is the conversion of
credit sales into cash.
 In factoring, a financial institution (factor)
buys the accounts receivable of a company
(Client) and pays up to 80%(rarely up to 90%)
of the amount immediately on agreement.
 Factoring company pays the remaining
amount (Balance 20%-finance cost-operating
cost) to the client when the customer pays the
debt.
4
CHARACTERISTICS OF
FACTORING
 Usually the period for factoring is 90 to 150
days.
 Credit rating is not mandatory. But the
factoring companies usually carry out credit
risk analysis before entering into the
agreement.
 Factoring is a method of off balance sheet
financing.
 Bad debts will not be considered for
factoring.
5
 Indian firms offer factoring for invoices as low
as 1000Rs
 Cost of factoring=finance cost + operating cost.
Factoring cost vary according to the
transaction size, financial strength of the
customer etc.
 The cost of factoring vary from 1.5% to 3% per
month depending upon the financial strength of
the client's customer.
 For delayed payments beyond the approved
credit period, penal charge of around 1-2% per
month over and above the normal cost is
charged.
6
PROCESS OF
FACTORING
credit sales
Of goods (1)
client customer
Invoice (2)
Submit invoice
Payment up Copy(3) Pays the
to 80% amount(5)
intially(4)
factor
Pay the balance amt
(6)
7
FORMS OF FACTORING
 Recourse and Non recourse factoring
 Disclosed and undisclosed factoring
 Advanced factoring
 Maturity factoring
 Full factoring
 Bank participation factoring
 Cross border factoring
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RECOURSE FACTORING
 In recourse factoring, client undertakes to
collect the debts from the customer. If the
customer don't pay the amount on
maturity, factor will recover the amount
from the client. This is the most common
type of factoring. Recourse factoring is
offered at a lower interest rate since the
risk by the factor is low. Balance amount
is paid to client when the customer pays
the factor
9
NON RECOURSE
FACTORING
 In non recourse factoring, factor
undertakes to collect the debts from the
customer. Balance amount is paid to
client at the end of the credit period or
when the customer pays the factor
whichever comes first. The advantage of
non recourse factoring is that continuous
factoring will eliminate the need for credit
and collection departments in the
organization
10
 Disclosed
In disclosed factoring client's customers are notified
of the factoring agreement. Disclosed type can
either be recourse or non recourse.
 Undisclosed
In undisclosed factoring, client's customers are not

notified of the factoring arrangement. Sales
ledger administration and collection of debts are
undertaken by the client himself. Client has to
pay the amount to the factor irrespective of
whether customer has paid or not. But in
disclosed type factor may or may not be
responsible for the collection of debts depending
on whether it is recourse or non recourse. 11
FUNCTION OF A FACTOR
 Collection
 Sales ledger administration
 Credit protection
 Short term funding
 Advisory services
12
FACTORING VIS-À-VIS BILL
DISCOUNTING
 Factoring and bill discounting are similar
to the extent that both make available
finance against the a/c receivables held
by client.
 So question ??
what difference between these?
13
DIFFERENCE
Bills discounting factoring
Transaction oriented i.e.each bill Whereas here a pre payement

separately assesed and against all unpaid and not dues
discounted. invoices.
Discounted bill can be It can not be rediscounted.

rediscounted severel times befor
they mature.
Not taking the responsibility of But here it take all responsibility.

sales Léger admintration and
collection of debts.
Its usaualy with recourse to the It can be any of type.

client.
14
COST AND BENEFITS OF
FACTORING
 There are two types of cost involve:-
1)The factoring commission or service fees
2)The interest on advance granted by the
factor to the firm
 Factoring has the following benefits:-
1)Instant cash against credit sales
2)Improved cash flow leads to more profit
and growth
3)Improved efficiency
15
Continue..
4)Reduction of current liabilities so
improved in current ratio.
5)More concentrate on manufacturing and
marketing.
6)Helps the firm to save cost of credit
administration due to the scale of
economics and specialization.
16
FACTORING IN INDIAN CONTEXT
 In 1988,factoring service launched by RBI
in India.
 Firstly it is started by SBI and Canara bank
during the year 1991.
 RBI permitted banks to engage in the
factoring business as departmental services
and through their subsidiaries.
 RBI makes it mandatory to get LOD(letter of
disclaimer) before proceeding for factoring.
17
FACTORING COMPANIES IN INDIA
 Canbank Factors Limited

 SBI Factors and Commercial Services P
vt. Ltd
 The Hongkong and Shanghai Banking
Corporation Ltd
 Foremost Factors Limited
 Global Trade Finance Limited

Export Credit Guarantee Corporation of
India Ltd
 Citibank NA, India
18
EXAMPLE OF SBI FACTOR
 SBI factor, a subsidiary of state bank of
India is one of the leading factoring
company in India with a assets base
700.100cr.
 Established in feb,1991.
 Primary objective to provide domestic
factoring services to SMEs .
 For design to improve the cash flow
position of SMEs.
19
SBI offers
[A] Domestic factoring
 Recourse factor
 Non-recourse factor
[B] Export factoring

 Export factor
 Import factor
20
SUPPOSE…
 A small firm has Credit sales:- 80lakh
 Avg collection period:- 80days
 Bad debts loss:-1% of credit sales
 A factor is appointed to by the firm for
that he will receive charge 2%com.and
also pay advance against receivable to
the firm at interest @18% after with
holding 10% as a reserve.
What is annual cost of factoring to the firm?
21
Solution;
 Avg level of
receivables=8,00,000*80/360=17,77,778
 Factoring commission=0.02*17,77,778=35,556
 And reserve=0.10*17,77,778=1,77,778
Thus, the amount available for advance

is:=17,77,778(-)35,556(-)1,77,778
=15,64,444
Factor will also deduct 18%int before paying the
advance.
Int=15,64,444*0.18*80/360=62,578
Annual cost of factoring=35,556 +62,578=98134
22
THANK YOU
23
Sources:-
Internet
FM book(I M pandey)
FS book(M Y khan)
24

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FACTORING

REDUCED DEBTS WORRIES

In undisclosed factoring, client's customers are not

what difference between these?

Transaction oriented i.e.each bill Whereas here a pre payement

Discounted bill can be It can not be rediscounted.

Not taking the responsibility of But here it take all responsibility.

Its usaualy with recourse to the It can be any of type.

 Canbank Factors Limited

[B] Export factoring

Thus, the amount available for advance

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