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Financial Market• and Sen,lee• Dl•eountlng, Factoring and For/a/ting

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(i) The client has to look after the sales ledger administration and and credit w orthy sellers and hence it is also called 'Selected Sell
collection work and Factoring ' . er Ba \(•d
(ii) The factor has to provide finance and assume the credit risk.
(1JII) International Factoring FACTORING Vs. DISCOUNTING
Factoring differs from discoun ting in many respec ts. They ar;-
Under this type, the services of a factor in a domestic business are
simply extended to international business. Factoring is done purely on the (i) Factoring is a br?ader t~rm coverin g the enti re trade debts of a
basis of the invoice prepared by the exporter. Thus, the exporter is able to client whereas d iscounting covers only those trade debts wL
. bl •uch
get immediate cash to the extent of 80% of the export invoice under are backed by Accounts rece1va es.
international factoring . International factoring is facilitated with the help (ii ) Under factoring, the fa cto r purchas es the trade de bt and thus
of export factors and import factors . becomes a holder for value. . But, und er discounting the hna nc1er
ac ts simply as an agent o_f his cu_sto~ er a_n d he does not become the
(1JII) Suppliers Guarantee Factoring ow ner. In other w ords, di scounting 1s a kind of advance ,1gainst bills
This type of factoring is suitable for business establishments which whereas factoring is an outngh t purchase of trade debts
sell goods through middlemen . Generally, goods are sold through (iii) The factors ma y extend credit wi thout an y rec~urse to the client in
wholesalers, retailers or through middlemen . In such cases, the factor , the event of non-pa yment by cus tomers. But , discounting is ah,·ais
guarantees the supplier of goods against invoices raised by the supplier 1 made with recourse to the client. ·
upon another supplier. The bills are assigned in favour of the factor who (iv) Account receivables unde r discount c1re subject to rediscountmg
guarantees payment of those bills. This enables the supplier to earn profits whereas it is not possible unde r fac tonng .
without much financial involvement.
(Ix) Limited Factoring
. (v) Factoring involves purchase a nd collection of debts, management
of sales ledger, assumption of cred it risk, provision of finance and
rendering of consultancy services. Bu t, discounting involves simpl)
Under this type, the factor does not take up all the invoices of a the provision of finance alone .
client. He discounts only selected invoices on merit basis and converts
credit bills into cash in respect of those bills only. (vi) Bill disco u nting fi nance is a sp ecific one in the sense th,1t 1t 1,
based on an individual bil l aris ing out o f an individ ual transaction
(x) Buyer Based Factoring only. On the other han d , fa c toring is base d on the 'whole
turnover' , Le ., a bulk fi n a nce is provided against .i num ber of
In most cases, the factor is acting as an agent of the seller. But under
this type, the buyer approaches a factor to discount his bills. Thus, the unpaid invoices.
initiative for factoring comes from the buyers' end . The approved buyers (vii) Underdi9counti ng, the dra wee is always aware of the bank \charge
, of a company approach a factor for discounting their bills to the company on receivables. But, under undisclosed factoring every thi ng 1~ kept
in question. In such cases, the claims on such buyers are paid by discounting highly confidential.
the bills without recourse to the seller and the seller also gets ready cash. (viii) Bill financing throug h discou nt ing requires regis trnt ion of charges
This facility is available only to reputed credit worthy buyers and hence it with the Registrar of Com pa nies . lnfa ct. factori ng docs not require
is also called selected Buyer Based Factoring. such registration.
(xi) Seller Based Factoring (ix) Dlscounting is al waysa kind o f '' i11-b,1l,111 ce~heetfi na ncing That
is , both the a mou nt of rccC' iv,1 ble'- ,111d li,111 k cred it .ire shown 1n
Under this type, the seller, instead of discounting his bills, sells all th e balance sheet itse lf dul' to its ·w it h reco urse ' na ture Bu!,
his accounts receivables to the factor, after invoicing the customers . The
fac toring is al w a ys "o ff - balance <.h cl'I fin;inci ng ."
seller's job is over as soon as he prepares the invoices. Thereafter, all the
documents connected with the sale are handed over to the factor who
takes over the remaining functions . This facility is extended to reputed COST OF FACTORING
The cost of factoring co mprises o f two aspects namely finance chargt<
and service fees . Since the fa cto r p ro vidC's 80% of the invoice ,1~ -redll ~f