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    Factoring and Ing

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    Ansh Sardana
    Factoring and forfeiting are alternative financing tools to banks that are widely used. [1] Factoring involves purchasing invoices from businesses at a discount, providing them with cash flow. Forfeiting specifically deals with receivables from deferred export payments, purchasing the receivables from exporters. [2] Both provide cash to companies in exchange for fees and guarantees, though forfeiting typically involves larger sums and longer timeframes. [3] Factoring and forfeiting allow businesses access to liquid assets and financing when banks have strict lending criteria.

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    Factoring and Ing

    Uploaded by

    Ansh Sardana
    43 views7 pages
    Factoring and forfeiting are alternative financing tools to banks that are widely used. [1] Factoring involves purchasing invoices from businesses at a discount, providing them with cash flow. Forfeiting specifically deals with receivables from deferred export payments, purchasing the receivables from exporters. [2] Both provide cash to companies in exchange for fees and guarantees, though forfeiting typically involves larger sums and longer timeframes. [3] Factoring and forfeiting allow businesses access to liquid assets and financing when banks have strict lending criteria.

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    Factoring and forfeiting are alternative financing tools to banks that are widely used. [1] Factoring involves purchasing invoices from businesses at a discount, providing them with cash flow. Forfeiting specifically deals with receivables from deferred export payments, purchasing the receivables from exporters. [2] Both provide cash to companies in exchange for fees and guarantees, though forfeiting typically involves larger sums and longer timeframes. [3] Factoring and forfeiting allow businesses access to liquid assets and financing when banks have strict lending criteria.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    43 views7 pages

    Factoring and Ing

    Uploaded by

    Ansh Sardana
    Factoring and forfeiting are alternative financing tools to banks that are widely used. [1] Factoring involves purchasing invoices from businesses at a discount, providing them with cash flow. Forfeiting specifically deals with receivables from deferred export payments, purchasing the receivables from exporters. [2] Both provide cash to companies in exchange for fees and guarantees, though forfeiting typically involves larger sums and longer timeframes. [3] Factoring and forfeiting allow businesses access to liquid assets and financing when banks have strict lending criteria.

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    of 7

    FACTORING AND FORFAITING

    The main problem nowadays when trading with foreign countries is to


    obtain payments from importers. Financing companies offer financial
    support to traders in exchange for fees, and guarantees. There are two
    types of financing forms: factoring and forfeiting. They are widely used as
    alternative financing tools to banks.

    FACTORING

    Definition: A financing method in which a business owner sells


    accounts receivable at a discount to a third-party funding
    source to raise capital

    Factoring is the process of purchasing invoices from a business at a certain


    discount. Factors provide financing service to small an medium-sized
    companies who need cash. For this the factor charges a fee equal to a
    percentage of the invoices purchased generally 5%. Factoring is a low value
    short term financing forms. It involves the purchase of invoices, for an
    amount less than $10,000 an 90-120 days payment terms. After shipping
    your goods or services, the factor purchases the invoices, and advances
    cash to you company. Factoring provide liquid assets to small business. In
    fact banks have strict criteria when lending money so it is difficult for these
    companies to obtain loans.

    Why we need Factoring?

    1. For Smooth cash flow

    2. For meeting working capital needs

    3. Overcome the situation from high cost of capital and reduced profit .
    CHARACTERSTICS OF FACTORING

    1. The normal period of factoring is 90 days and rarely exceeds more


    than 150 days.

    2. It is costly.

    3. Factoring is not possible in case of bad debts.

     TYPES OF FACTORING SERVICES

    Full Servicing Factoring: This is also known as without recourse factoring


    service. It is the most comprehensive type of factoring arrangement
    offering all types of services, namely: (a) Finance, (b) Sales ledger
    administration, (c) Collection, (d) Debt protection, and (e) Advisory
    services. The most important characteristic of this type of factoring service
    is that it gives protection against bad debts to the client.

    In other words, in case the customer fails to pay, the factor will absorb the
    losses arising from insolvency or bankruptcy of the client’s customers.

    Recourse Factoring: In such a type of factoring arrangement, the factor


    provides all types of facilities except debt protection. That means, in other
    words, the client is responsible for any bad debts arising from insolvency of
    the client’s customers.

    Maturity Factoring: Under this type of factoring arrangement, except for


    providing finance, all other facilities are provided to the client. As far as
    finance is concerned, the client is paid at the end of a pre-determined date
    or maturity date whether or not the customers have settled their dues in
    respect of credit sales.
    Invoice Discounting: In such type of arrangement, only finance is provided,
    and, hence, no other services are offered in respect of receivables.

    Agency Discounting: Under this arrangement, the facilities of finance and


    protection against bad debt are provided by the factor. As against this, the
    sales ledger administration and collection of book debts are carried out by
    the client himself.

     FACTORING: ADVANTAGES AND DISADVANTAGES

     1) Under the factoring arrangement the client receives prepayment


    upto 80-90 percent of the invoice value immediately and the balance
    amount after the maturity period. This helps the client to improve
    cash flow position which enables him to have better flexibility in
    managing working capital funds in an efficient and effective manner.
    Besides this, such arrangement also improves the ability of the client
    to develop sales to credit worthy customers.

     2) If the client avails the services of the factor in respect of sales


    ledger administration and collection of receivables, he need not have
    any administrative set up for this purpose. Naturally this will result
    into a substantial saving in time and cost of maintaining own sales
    ledger administration and collecting receivables from the customer.
    Thus, it will reduce administrative cost and time.As a result of this,
    the client can spare substantial time for improving the quality of
    production and tapping new business opportunities.


     3) When without recourse factoring arrangement is made, the client
    can eliminate the losses on account of bad debts. This will help him to
    concentrate more on maximizing production and sales. Thus, it will
    result in increase in sales increase in business and increase in profit.

     4) The client can avail advisory services from the factor by virtue of
    his expertise and experience in the areas of finance and marketing.
    This will help the client to improve efficiency and productivity of his

     organization. Besides this, with the help of data base, the factor can
    readily provide information regarding product

     design/mix, prices, market conditions etc., to the client which could


    be useful to him for business decisions.The above mentioned benefits
    will accrue to the client provided he develops a better business
    relationship with the factor and both of them have mutual trust in
    each other.

     Disadvantages of Factoring

     1) Image of the client may suffer as engaging a factoring agency is not


    considered a good sign of efficient management.

     2) Factoring may not be of much use where companies or agents


    have one time sales with the customers.

     3) Factoring increases cost of finance and thus cost of running the


    business.
     4) If the client has cheaper means of finance and credit (where goods
    are sold against advance payment), factoring may not be useful.

    FORFEITING

    “Forfait” is derived from French word ‘A Forfait’ which


    means surrender of fights. Forfeiting is a mechanism by
    which the right of 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.

    In trade finance, forfeiting involves the purchasing of


    receivables from exporters. The forfeiter takes on all risks
    involved with the receivables. It is different from the
    factoring operation in the sense that forfeiting is a
    transaction-based operation while factoring is a firm-based
    operation: In factoring, a firm sells all its receivables while in
    forfeiting, the firm sells one of its transactions.

    Exporters sometimes use forfeiting. Forfeiting, which in some ways is


    similar to factoring, involves the surrender by the Seller of its rights
    to a negotiable debt instrument(such as a promissory note, or a
    usance letter of credit) in return for an immediate payment from the
    Forfeiter. Typically, forfeiting is done with longer-term accounts
    receivable-typically due in one to five years and when large amounts
    of money (typically in millions of dollars) are involved. These longer-
    term accounts receivable may carry the guarantee of the foreign
    government or may be covered by a letter of credit, a promissory
    note, or a bill of exchange.

    The advantage to the exporter of forfeiting is immediate cash against


    its accounts receivable. The cost involves the fact that the forfeiter

    pays less than the face value of the obligation. The discount rate
    charged by the Forfeiter is a function of a number of factors including:

     Country risk

     The maturity date of the obligation

     The stability of the currency the sale is denominated in

     The value or safety of any guarantee associated with the


    accounts receivable

     Whether or not the transaction is done with or without recourse


    to the Seller.
    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.
    •Documentation Fee:- where elaborate legal formalities are involved.
    •Service Charges:- payable to Exim Bank.

    WHY FORFAITING HAS NOT DEVELOPED :-

     Relatively new concept in India.


     Depreciating Rupee In International market.
     High cost of funds.
     RBI Guidelines are not suitable.
     Very few institutions offer the services in India. Exim Bank alone
    does. .
     Lack of awareness.

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