Factoring Services.....

1. Factoring
Presented by:
Rajesh Kumar
MBA(Finance), ACS, AIII

2. WHAT IS FACTORING ?
Factoring is the Sale of Book Debts by a firm (Client) to a financial institution
(Factor) on the understanding that the Factor will pay for the Book Debts as
and when they are collected or on a guaranteed payment date. Normally, the
Factor makes a part payment (usually upto 80%) immediately after the debts
are purchased thereby providing immediate liquidity to the Client.
PROCESS OF FACTORING
CLIENT CUSTOMER
FACTOR

3. Definition:
• Factoring is defined as ‘a continuing legal relationship
between a financial institution (the factor) and a
business concern (the client), selling goods or
providing services to trade customers (the
customers) on open account basis whereby the
Factor purchases the client’s book debts (accounts
receivables) either with or without recourse(recourse
risk with client non recourse risk with factor) to the
client and in relation thereto controls the credit
extended to customers and administers the sales
ledgers’.

4. Explanation
• It is the outright purchase of credit approved
accounts receivables with the factor assuming bad
debt losses.
• Factoring provides sales accounting service, use of
finance and protection against bad debts.
• Factoring is a process of invoice discounting by which
a capital market agency purchases all trade debts
and offers resources against them.

5. So, a Factor is,
a) A Financial Intermediary
b) That buys invoices of a manufacturer or a trader,
at a discount, and
c) Takes responsibility for collection of payments.
The parties involved in the factoring transaction are:-
a) Supplier or Seller (Client)
b) Buyer or Debtor (Customer)
c) Financial Intermediary (Factor)

6. Why use Factoring?
• Through the use of Factoring receivables are instantly
converted into cash leading to improved cash flows that can
help funding of future growth.
• It facilitate an efficient follow up of payments from buyers,
which is made possible through relationships developed by
factors with client’s buyers.
• Factoring provides credit protection for export sales which
enables to do business with buyers who are unwilling to open
Letters of Credit.
• Factoring also provides other peripheral services such as
advisory services, credit assessment, etc.

7. Evolution of factoring
• The term factor has its origin from the Latin word,
‘Facere’ meaning to get things done. The dictionary
defines a factor as an agent particularly a mercantile
agent. Factoring has a long fascinating history which
traces back through several centuries.
• In the early stages factors were itinerant merchants
who were entrusted with merchandise belonging to
others.

8. Factoring Profile(India)
• Number of factoring companies – 08
• From Domestic factoring turnover – 1450
(million euros)
• From International factoring turnover - 175
(million euros)
• From Total factoring turnover - 1625
(million euros)

9. • India still has limited number of players engaged in providing factoring
services. Most of the players engaged in providing factoring services
currently, are
•
• Specialized factor institutions
SBI Global Factors
Canbank Factors
IFCI Factors
• Commercial banks
HSBC
ICICI Bank
Axis Bank
• Specialized financial institutions
ECGC

10. Factoring is of recent origin in Indian Context.
Kalyana Sundaram Committee recommended introduction of
factoring in 1989.
Banking Regulation Act, 1949, was amended in 1991 for Banks
setting up factoring services.
SBI/Canara Bank have set up their Factoring Subsidiaries:-
 SBI Factors Ltd., (April, 1991)
 CanBank Factors Ltd., (August, 1991).
RBI has permitted Banks to undertake factoring services
through subsidiaries.

11. Factoring Bill clearance to attract
private players
• Factoring business in india is dominated by
public sector bank and financial institution like
sbi global factor and canbank factor. Bank such
as hsbc etc also provide factoring.
• Sbi global factor is the market leader with
nearly 80% market capitalization.
• Government passed factoring bill in
parliament to attract more factoring company
in the field.

12. Factoring business scenario in india
• Factoring business is much lower compare
with the other developing countries in the
world. India’s factoring volume share is less
than 1% of the world factoring business.
• And contribution of working capital
requirement of the company by the factor is
less than even .5%. Where as globally this is
above 5%

13. Factoring and SME sector
• Factoring is a short term finance for sme’s .and it
increases working capital requirement of the company.
• India Factoring & Finance Solutions Pvt Ltd, a joint
venture of Punjab National Bank (PNB), along with
Malta-based FIM Bank Group, Italy- based Banca IFIS,
and Blend Financial Services, Mumbai, is expanding its
factoring services across Maharashtra and cities like
Pune, Nashik, Nagpur and Aurangabad for
entrepreneurs, small and medium enterprises (SMEs)
and small-scale industries to provide much needed
liquidity for their business

14. • The company lends minimum Rs 1 crore to
maximum Rs 20 crore for the SMEs. Currently,
the size of its business is Rs 2300 crore.
• India Factoring is facilitating financial solutions
to more than 200 SMEs in Delhi, Mumbai,
Chennai, Bangalore, Kolkata, Ahmedabad and
Hyderabad

15. SBI Global Factors Limited (SBIGFL)
• it is the only provider of international
factoring, domestic factoring and forfaiting
services under one roof in India
• SBIGFL is headquartered in Mumbai with six
regional offices - one each in New Delhi,
Bangalore, Chennai, Hyderabad, Ahmedabad
and Kolkata

16. • SBI Global Factors Limited (SBIGFL) formerly
Global Trade Finance Ltd was promoted as a
joint venture by Export Import Bank of India
(Exim Bank), West LB, Germany; and
International Finance Corporation
Washington . It commenced its operations
from September 2001. In March 2008, State
Bank of India purchased the equity stake of
Exim Bank, FIM Bank, Malta, and IFC, and
acquired 92.08% stake in the GTF

17. The NBFC–Factor (Reserve Bank)
Directions, 2012
• Any company planning to undertake factoring
business will have to register itself as an ‘NBFC-Factor’
with (RBI) and should have a minimum
net owned fund of Rs 5 crore.
• Under this act every company other than bank
would be registered as nbfc. Every company
intending to undertake factoring business shall
make an application for grant of certificate of
registration as an NBFC-factor to the (Reserve)
Bank

18. Frequently asked questions on factor
• Why should I use factoring?
• Sellers don’t have to wait for the usual long
period to get paid by their buyers. The seller will
therefore have a healthier cash flow, which will
accelerate the growth.
• How much advance can I get?
• Advances are made as a percentage of invoice
value, based on criteria such as quality of
receivables, number and quality of the buyers
and your requirements. Typically upto 80% of
invoice value is advanced

19. • Would Factoring cause any unpleasantness
between the seller and its buyers?
• factoring helps the seller to avoid the
embarrassment of having to directly seek
payment from the buyers.
Would using factoring give buyers the idea that
the seller is in financial difficulties?
• On the contrary, International customers now
accept factoring as a normal, progressive
business service.

20. It is an indication of a growing organization with
keen focus on its core activities like production
and marketing and outsourcing non core
activities like collection and sales ledger
management to experienced professionals.
• Which types of industries are suitable for
factoring?
• A large number of industries are now covered
under factoring, including automobiles,
pharmaceuticals, textile, garment and
engineering. In addition to the manufacturing
sector, the services sector industries such as
travelling, telecommunications, software
services and so on are also suitable for factoring

21. • What are the cost involved in factoring?
• There are 3 elements of Factoring cost:
• Service fee
• Discount charge
• One time setup fee
• What is disclose and undisclosed factoring?
• In disclose factoring , the debtor is informed of the
assignment of debts to the factor Alternatively,
under undisclosed factoring, the debtor is not
informed of the agreement entered into between
the seller and the factor. most of the cases disclose
factoring is happen.

22. As of today,
• Worldwide, factoring volume is more than
USD 700 billion a year
• Spread over nearly 60 countries and covering
more than 1,00,000 businesses.
• Particularly in developed countries, factoring
is an accepted way of conducting business.

23. Steps in Factoring
Steps in Domestic Factoring:
Customer ( Buyer) places the order with Client (Seller)
Client (Seller) obtains a prepayment limit from Foremost Factors.
Client (Seller) delivers goods/services to the customer (Buyer).
Copies of Invoices, along with a Notice to Pay, are submitted to Foremost
Factors.
Foremost Factors makes a prepayment advance to the Client (Seller).
Foremost Factors follows up on payment with the Customer (Buyer)
Customer (Buyer) makes payment to Foremost Factors.
Foremost Factors makes the balance payment to the Client (Seller).

24. MECHANICS OF FACTORING
 The Client (Seller) sells goods to the buyer and prepares invoice with a notation
that debt due on account of this invoice is assigned to and must be paid to the
Factor (Financial Intermediary).
 The Client (Seller) submits invoice copy only with Delivery Challan showing
receipt of goods by buyer, to the Factor.
 The Factor, after scrutiny of these papers, allows payment (,usually upto 80% of
invoice value). The balance is retained as Retention Money (Margin Money). This
is also called Factor Reserve.
 Once the invoice is honoured by the buyer on due date, the Retention Money
credited to the Client’s Account.
 Till the payment of bills, the Factor follows up the payment and sends regular
statements to the Client.

25. CHARGES FOR FACTORING SERVICES
• Factor charges Commission (as a flat percentage of value of Debts purchased)
(0.50% to 1.50%)
• Commission is collected up-front.
• For making immediate part payment, interest charged. Interest is higher than
rate of interest charged on Working Capital Finance by Banks.

26. Different kinds of factoring services
Debt administration:
• The factor manages the sales ledger of the
client company. The client will be saved of the
administrative cost of book keeping, invoicing,
credit control and debt collection. The factor
uses his computer system to render the sales
ledger administration services.

27. • Credit Information: Factors provide credit
intelligence to their client and supply periodic
information with various customer-wise analysis.
• Credit Protection: Some factors also insure against
bad debts and provide without recourse financing.
• Invoice Discounting or Financing : Factors advance
75% to 80% against the invoice of their clients. The
clients mark a copy of the invoice to the factors as
and when they raise the invoice on their customers.

28. Process:
• Basically there are three parties to the
factoring services as depicted below:
Client customer
factor
Buyer

29. BILL DISCOUNTING
• While discounting a bill, the Bank buys the bill
(i.e. Bill of Exchange or Promissory Note)
before it is due and credits the value of the bill
after a discount charge to the customer's
account. The transaction is practically an
advance against the security of the bill and the
discount represents the interest on the
advance from the date of purchase of the bill
until it is due for payment.

30. DIFFERENT TYPES OF BILLS DISCOUNTING
• Trade bill discounting
• Accommodation bill discounting

31. CONDITIONS
• A bill must be a usance bill.
• It must have been accepted and bears at least
two good signatures (e.g. of reputable
individuals, companies or banks etc.)
• The Bank will normally only discount trade
bills.
• Where a usance bill is drawn at a fixed period
after sight the bill must be accepted to
establish the maturity.

32. CONDITIONS
• The discount should be based on real trade
background.
• The discount tenor starts from the date of
discount and expires at the maturity of the
bill.

33. Advantages of Bill Discounting
(1) Safe Employment of Fund: The bank by discounting the clean or
documentary bill advances the amount to the payee. On maturity
of the bill, the amount is collected from the drawer. The discount is
the safe earning of the bank because the bill of exchange is a
negotiable instrument. If at any time the bill is dishonoured, the
payee is responsible to make the full payment of the bill to the
bank.
(2) Certainty of payment: On the maturity of the bill, there is
certainty of payment to the bank. It is thus a short term advance
with certainty of payment.
(3) The advance is Liquid: As the date of payment to the bank is
sure, the short term advance is quite liquid Rediscounting facilities
are also available on discounted bill of exchange

34. Cont...
(4) Free from price fluctuations: The payment made by
the bank on discounted bill is free from price
fluctuations. The bank realizes the bill at par value.
(5) Profitable earning: The discount rate is usually
higher than the rate of interest charged on loan/and
advances If therefore offers good earning with no risk.
(6) Facility of rediscounting: The banker has the facility
of rediscounting the bills if it is short of funds of any
time.

35. Bill Discounting Vs Factoring
• Short term duration
• More paper work
• 3 days grace period
• Requirement of original
documents
• Discounted bills may be
re-discounted several
times before they
mature for payment
• Long term
• Less paper work
• Higher grace period
• Copies -o.k.
• It can not re-discount
in the case with
factoring.

36. TYPES OF FACTORING
 Recourse Factoring
 Non-recourse Factoring
 Maturity Factoring
 Cross-border Factoring
 International Factoring

37. RECOURSE FACTORING
 Upto 75% to 85% of the Invoice Receivable is factored.
 Interest is charged from the date of advance to the date of collection.
 Factor purchases Receivables on the condition that loss arising on account
of non-recovery will be borne by the Client.
 Credit Risk is with the Client.
 Factor does not participate in the credit sanction process.
 In India, factoring is done with recourse.

38. NON-RECOURSE FACTORING
 Factor purchases Receivables on the condition that the Factor has
no recourse to the Client, if the debt turns out to be non-recoverable.
 Credit risk is with the Factor.
 Higher commission is charged.
 Factor participates in credit sanction process and approves credit
limit given by the Client to the Customer.
 In USA/UK, factoring is commonly done without recourse.

39. MATURITY FACTORING
 Factor does not make any advance payment to the Client.
 Pays on guaranteed payment date or on collection of Receivables.
 Guaranteed payment date is usually fixed taking into account
previous collection experience of the Client.
 Nominal Commission is charged.
 No risk to Factor.

40. CROSS - BORDER FACTORING
 It is similar to domestic factoring except that there are four parties, viz.,
a) Exporter,
b) Export Factor,
c) Import Factor, and
d) Importer.
 It is also called two-factor system of factoring.
 Exporter (Client) enters into factoring arrangement with Export Factor in
his country and assigns to him export receivables.
 Export Factor enters into arrangement with Import Factor and has
arrangement for credit evaluation & collection of payment for an agreed
fee.
 Notation is made on the invoice that importer has to make payment to the
Import Factor.
 Import Factor collects payment and remits to Export Factor who passes on
the proceeds to the Exporter after adjusting his advance, if any.
 Where foreign currency is involved, Factor covers exchange risk also.

41. International Factoring:
It means the services of a factor in a domestic business are
simply extended to international trade. It depends upon the
type of export factoring and the arrangement made by the
exporter & the factor.
Types:
 Two factor system
Single factor system
Direct export factor system
Direct import factor system

42. FORFAITING
“Forfait” is derived from French word ‘A Forfait’ which
means surrender of fights.
Forefaiting is a mechanism by which the right for
export receivables of an exporter (Client) is purchased
by a Financial Intermediary (Forfaiter) without
recourse to him.
It is different from International Factoring in as much
as it deals with receivables relating to deferred
payment exports, while Factoring deals with short term
receivables.

43. FORFAITING (contd…)
• Exporter under Forfeiting surrenders his right for claiming payment
for services .
• Bank (Forfeiter) assumes default risk possessed by the Importer.
• Credit Sale gets converted as Cash Sale.
• Forfeiting is arrangement without recourse to the Exporter (seller)
• Operated on fixed rate basis (discount)
• Finance available upto 100% of value (unlike in Factoring)
• Introduced in the country in 1992.

44. COSTS INVOLVED IN FORFAITING
• Commitment Fee:- Payable to Forfeiter by Exporter in consideration of
forfeiting services.
• Commission:- Ranges from 0.5% to 1.5% per annum.
• Discount Fee:- Discount rate based on the period concerned.
• Documentation Fee:- where elaborate legal formalities are involved.
• Service Charges:- payable to Exim Bank.

45. WHY FORFAITING HAS NOT
DEVELOPED
• Relatively new concept in India.
• Depreciating Rupee
• No ECGC Cover
• High cost of funds
• High minimum cost of transactions (USD 250,000/-)
• RBI Guidelines are vague.
• Very few institutions offer the services in India. Exim Bank alone does.
• Long term advances are not favoured by Banks as hedging becomes
difficult.
• Lack of awareness.

46. FACTORING vs. FORFAITING
POINTS OF
DIFFERENCE
FACTORING FORFAITING
Extent of Finance Usually 75 – 80% of the
value of the invoice
100% of Invoice value
Credit
Worthiness
Factor does the credit
rating in case of non-recourse
factoring
transaction
The Forfaiting Bank
relies on the
creditability of the
Avalling Bank.
Services provided Day-to-day administration
of sales and other allied
services
No services are
provided
Recourse With or without recourse Always without
recourse
Sales By Turnover By Bills

47. STATUTES APPLICABLE TO
FACTORING
• Factoring transactions in India are governed by the following
Acts:-
a) Indian Contract Act
b) Sale of Goods Act
c) Transfer of Property Act
d) Banking Regulation Act.
e) Foreign Exchange Regulation Act.

48. Salient Features of New Bill:
 Any company can commence factoring by obtaining registration
from the RBI as a non-banking finance company.
 Banks or corporations established under an Act of Parliament
can also undertake factoring without being required to obtain
registration from RBI.
 Factors are granted exemption from stamp duty on documents
executed for the purpose of assignment of receivables in favour of
factors.

49. WHY FACTORING HAS NOT
BECOME POPULAR IN INDIA
• Banks’ reluctance to provide factoring services.
• Bank’s resistance to issue Letter of Declaration (Letter of
Declaration is mandatory as per RBI Guidelines).
• Problems in recovery.
• Factoring requires assignment of debt which attracts Stamp
Duty.
• Cost of transaction becomes high.

50. Benefits of Factoring:
Financial Services –
1. Clients will be able to convert their trade debts into cash
upto 80% immediately as soon credit sales are over.
2. As sales grow the financial assistance grows and both are
proportional to each other.
3. It assures immediate cash flow.
 Collection Services-
1. Collection work is done by factoring organization, leaving the
client to concentrate on production alone.
2. Cost of collection is cut down due to professional expertise of
a factor.

51. ‘Credit Risk’ service –
The client need not worry about the loss due to bad debt.
Even if the customer fails to pay the debt, it becomes the
responsibility of the factor to pay.
 Consultancy service –
Factors collect information regarding credit worthiness of
customers of theirs clients, ascertain their track record and
pass the same to their clients. It saves the time of clients as
all the work is done by factors on its behalf.
Economic in Servicing –
Factors charge less as the overhead cost is spread over a
number of clients.

52. Off-Balance sheet Financing –
It leads to reduction in debt & collection problems. The
client can utilize the money to reduce current liabilities.

53. COMPARATIVE ANALYSIS
BILLS
DISCOUNTED
FACTORING FORFAITING
1. Scrutiny Individual Sale
Transaction
Service of Sale
Transaction
Individual Sale
Transaction
2. Extent of
Finance
Upto 75 – 80% Upto 80% Upto 100%
3. Recourse With Recourse With or
Without
Recourse
Without
Recourse
4. Sales
Administration
Not Done Done Not Done
5. Term Short Term Short Term Medium Term
6. Charge
Creation
Hypothecation Assignment Assignment

54. Case Study:
ABC Aviation Inc., a fictional reseller of aviation parts, has focused on
international sales and was recently awarded contracts by companies in
Guatemala and Peru. Two of these contracts were small, totaling $250,000 in
sales, and were due in one month. The third contract, however, was valued at
$500,000 – a substantial amount for ABC Aviation. The parts for this contract
were due in two months. The following table outlines the orders:
Contract COGS Sale revenue Delivery Date Terms
1 $55,000 $100,000 Next month Net 45
2 $82,500 $1,50,000 Next month Net 45
3 $3,00,000 $5,00,000 2 months Net 45
The company has $150,000 in the bank – enough to cover the Cost of Goods Sold
(COGS) for the first two contracts, but not enough to cover the third contract.
The only way that ABC Aviation can fulfill these contracts is to use financing.

55. Working with the Export Import Bank:
Ex-Im Bank’s export credit insurance was critical for the success of the
transaction. The company managed to get the foreign clients approved,
which covered up to 90% of the receivable face value in case of default.
This coverage limited the risk to the point that the transaction could be
financed using factoring. However, the Ex-Im Bank also has a program that
covers up to 60% of the receivable face value if the goods are rejected by
the client. This added feature was essential in enabling the company to
purchase order (PO) financing as well.

56. Step 1: Deliver contracts 1 & 2
Before export factoring-
Contracts Cash Bank A/R Payroll General Expenses
2 $1,50,000 $2,50,000 $10,000 $1,37,000
Cash surplus $2500
Step 2: Use export factoring on first two invoices
After export factoring-
Contracts Cash (bank) A/R Reserve Payroll General Expenses
2 $3,50,000 $0 $50,000 $10,000 $1,37,500
Cash surplus $2,02,500

57. Step 3: Deploy purchase order finance
Immediately after PO fund
Contract Cash
(bank)
PO
funding
A/R Reserve Payroll General
expense
All 3 $3,50,000 $1,00,000 $5,00,000 $50,000 $10,000 $4,37,500
Cash
surplus
$2,02,500
Step 4: Factor the invoice for the last contract
After Export Factoring
Contracts Cash (bank) A/R Reserve Payroll General
expenses
All 3 $7,50,000 $0 $1,50,000 $10,000 $4,37,500
Cash surplus $3,02,500

58. What if a foreign client does not pay?
Account debtor default is an inherent risk in international transactions, where
collections can be difficult. However, this risk was greatly minimized by using
the Export-Import Bank’s credit insurance program.

59. Thank You.