study

1. FACTORING

2. FACTORING
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.

3. WHAT IS FACTORING ?
Factoring refers to an agreement in which accounts receivables or
debtors are sold by a firm (client) to the factor (financial
intermediary). It can also be defined as selling the receivables of a
firm at a discount to a financial organization (factor).

4. 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)

5. SERVICES OFFERED BY A
FACTOR
1. Follow-up and collection of Receivables from Clients.
2. Purchase of Receivables with or without recourse.
3. Help in getting information and credit line on customers (credit
protection)
4. Sorting out disputes, if any, due to his relationship with Buyer &
Seller.

6. PROCESS OF FACTORING
CLIENT CUSTOMER
FACTOR

7. • Client concludes a credit sale with a customer.
• Client sells the customer’s account to the Factor and notifies the customer.
• Factor makes part payment (advance) against account purchased, after adjusting
for commission and interest on the advance.
• Factor maintains the customer’s account and follows up for payment.
• Customer remits the amount due to the Factor.
• Factor makes the final payment to the Client when the account is collected or on
the guaranteed payment date.

8. 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.
 The drawing limit is adjusted on a continuous basis after taking into account
the collection of Factored Debts.
 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.

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

10. RECOURSE FACTORING
 Upto 75% to 85% of the Invoice Receivable is factored.
 Factor only manages the receivables without taking the risk of baddebt.
 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.
 Zero credit protection for the firm or client.
 In India, factoring is done with recourse.

11. 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.
 Client gets 100% credit credit protection even if baddebts occur.
 Also called full factoring.
 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.

12. 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.

13. ADVANCE FACTORING
 Factor makes advance payment.
 80% of the invoice value is paid in advance to the client.

14. Cross-border Factoring
• an exporter sells its accounts receivable to a factor, which then
contacts other factoring institutions in order
to collect what was owed to the exporter. This helps the exporti
ng business because it may divest itself of credit
risk (and perhaps currency risk as well).

15. Advantages of Factoring
• Improves efficiency
• Higher credit standing
• Reduces cost
• Additional Source
• Advisory Service
• Acceleration of Product cycle

16. limitations
• May lead to over-confidence in the behavior of client.
This results in overtrading and mismanagement
• Lack of professionalism and competence, resistance
to change etc
• Not suitable for small companies
• May impose constraints on the way to do business

17. 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.

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

19. THANK YOU