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Financial Market. and Sen,lc Discounting, Factoring and Forfaltlng 3 31

Credit Investigation and Undertaking of Credit Risk standard one. Ii the debtors fail to repay the deb ts, the entire responsibility
falls on the shoulders of the factor since he assumes the credit risk a:so. He
Th e fac tor ha s to monitor the fin a ncial pos ition of the custome
' can not pass on this responsibility to his client and , hence, this type of
caref ully, since, he ass_um es the risk of d efault in pa yment by customer
Factoring is also called 'Without Recourse' Factoring.
due to thei r financia l inabi li ty to pa y. Th is assumption of credit risk is on
o f the mos t important function s which the factor accepts. Hence, befor (II) With RecourH Factoring
accepting the ris k, he must be full y awa re of the financial via bility of th
As the very name suggests, under this type, the factor does not
cus to m er, h is pas t finan ci al perform ance record , his future ability, hi
assume the credit risk. ln other words, if the deb to rs d o not repay their
honesty and inte grity in the business world etc. For this purpose, the facto
also und ert akes cred it investiga tion wo rk . • dues in time and if their debts are outstanding beyond a fixed period ,
say 60 to 90 days from the due date, s uch d ebts are automa ti : ally assigned
Provision of finance back to the client. The client has to take up the wo rk of collec tion of
overdue account by himsel f. If the client wa nts the fac tor to go o·n with
After the finalisation of the agreemen t and sale of goods by the clien the collection work of overdue accounts, th e clien t has to pay extra charges
the factor provides 80% of the cred it sales as prepa yment to the clien called ' Refactoring Charges' .
Hence, the client can go ahead with his business plans or producti o
schedule w ithout any interruption. This payment is generally made witho u (Ill) Maturity Factorlno
an y recourse to the client. That is , in the event of non-payment, the facto Under this type, the factor does not provide immediate cash payment
has to bear the loss of payment .
to the client at the time of assignment of debts. He undertakes tcway cash
Rendering Con1ulta"cy Services as and when collections are made from the deb tors. The entire amount
collected less factoring fees is paid to the clien t immediately. Hence it is
Apart from the above, the factor also provides management service also called 'collection Factoring' . In fact, under this type, no finan cing 1s
to the client . He informs the client about the additional busines involved. But all other services are availa ble.
opportunities available, the changing business and financial profiles of th
customers, the likelihood of coming recession etc. (Iv) Bulk Factoring
Under this type, the factor provides finance after disclosing the fact of
lYPES OF FACTORING assignment of debts to the debtors concerned . Th is type of fa ctoring is
resorted to when the factor is not fully satisfied with the financial cond ition
The type of factoring services varies on the basis of the nature o
transactions between the client and the factor, the nature and volume o of the client. The work relating to sales ledger administration, cred it control ,
client's business, the nature of factor 's security etc. In general, the factorin , collection work etc., has to be done by the client himself. Since the notification
services can be classified as follows : has been made, the factor simply collects the deb ts on behali of the clien t.
This is otherwise called as "Disclosed Factoring" or "Notified Factt)ring" .
(i) Full service factoring or without recourse factoring
(ii) With Recourse Factoring (v) Invoice Factoring
(iii) Maturity Factoring Under this type, the factor simply _p ro vides finance agai nst in voices
(iv) Bulk Factoring without undertaking any other fu nctions. All works connected with sales
administration, collection of dues etc. have to be done by the client himself.
(v) Invoice Factoring
The debtors a:e not at all notified and hence they are not a ware of the financing
(vi) Agency Factoring arrangement. This type of factoring is very confidential in n.,ture and hence it
(vi i) International Factoring is called 'Confidential Invoice Discounting' or 'Undisclosed Factoring'.
(I) Full service Factoring (vi) Agency Factoring
Under this type, a factor provides all kinds of services discussed above, The wo rd agency has no meaning as fa r as fact ori ng 1s co ncerned .
Thu s, a fac tor provides fin ance, administers the sa les ledger, collects the Unde r thi s type, th e fa ctor ar.d the cli en t sha re thf' wo rk be tween
debts at his ris k and rend ers consultancy service. This type of factoring is a the mselv es as follows :
j