Factoring 1
Factoring 1
Factoring 1
Meaning
Importance of Factoring
Procedural aspects in Factoring
Financial Aspects
For Banks :
These services help the banks in improving the quality of their products.
Types of Factoring
1) Recourse Factoring :
Under recourse factoring, the factor buys trade receivables and provides collection services. The factor is
also responsible for maintaining the sales ledger. However, if payment is not made or default is incurred,
then the client is responsible for making the good the loss for factor. Thus, no protection from bad debts
is provided under this kind of arrangement. Such kind of arrangement is prevalent in developing
countries.
2) Non-Recourse Factoring :
This type of arrangement denotes absolute responsibility for the factor. In such cases, the factor is not
entitled to receive payments from the client for the debtors default. Such type of factoring is generally
more expensive than Recourse Factoring as it provides protection to the client. against bad debts. Such
type of arrangement is more popular in advanced economies.
3) Advance Factoring :
Such type of arrangement involves the payment of a pre-determined portion of the debt in advance. Such
portion may range between 75 percent and 90 percent. Remaining is paid after the collection is made.
The factor provides a drawing limit to the client immediately after the approval of the invoices The
client is responsible for making interest payments for the period elapsed between the date of advance
payment and the date of actual collection of the debt. Such interest rate is determined on the basis of
several factors such as the duration and credit standing of the client.
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4) Bank Participation Factoring :
This is a type of advance factoring. This type involves a bank offering an advance to the client
for financing a portion of the factor reserve, which is the difference between the factor debt
and the advance provided by the factor. For For example, if the factor extends an advance of
40 percent and the bank makes another advance of 30 percent of the debt, then client will only
have investment of 30 percent in the debt as the remaining is provided by the factor and the
bank.
5) Maturing Factoring :
This type of factoring is also known as Collection Factoring. No pre payment is made by the
factor to the client under this kind of arrangement. The payment is made on the date
guaranteed payment date. Alternatively, payment may also be made on the date of collection.
8) Invoice Factoring :
This type of factoring does not provide full service and hence is not commonly used today.
The factor purchases the debts payable to the client and thus provides liquidity to the firm.
9) Export Factoring :
It is called cross border factoring or international factoring as well. Export factors provide
specialized services as they have expert professionals. This type of factoring is especially
helpful to the new and small scale exporters.
10) Buyer-based, Seller-based and Selective Factoring :
Under buyer-based factoring, the factor maintains a list of buyers whose receivables may
be financed without recourse the seller. Under Seller-based factoring, the arrangements
may be with recourse or without recourse. It is also called selective factoring as seller may
not sell to the approved purchaser.
Procedural Aspects in Factoring and
Financial aspects
Procedural aspects in factoring
The seller sells the goods to the buyer and raises the invoice
on the customer.
The seller then submits the invoice to the factor for
funding. The factor verifies the invoice.
After verification, the factor pays 75 to 80 percent to the
client/seller.
The factor then waits for the customer to make the
payment to him.
On receiving the payment from the customer, the factor
pays the remaining amount to the client.
Fees charged by factor or interest charged by a factor may
be upfront i.e. in advance or it may be in arrears. It
depends upon the type of factoring agreement.
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In case of non — recourse factoring services factor
bears the risk of bad debt so in that case factoring
commission rate would be comparatively higher.
The rate of factoring commission, factor reserve, the
rate of interest, all of them is negotiable. These are
decided depending upon the financial situation of
the client.
The factor gets control over the client’s debtors, to
whom the goods are sold on credit or credit is
extended and also monitors the client’s sales ledger.
Factoring Financial and current scenario
In India
Notice of assignment
Submit all copies of invoice, challan, other
evidences relating to the factored account.
Power of Attorney.
Legal Status of Factor is that of an Assignee.
IN Case of multiple financing, letter of disclaimer is
needed.
Stamp Duty.
Factoring in India
Small Industrial Development Bank of
India(SIDBI).
Canbank Factors Limited
Standard Chartered bank
Globe Trade Finance Limited.
SBI factors and commercial servicesPvt.Ltd.
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