Factoring and ing

8/2/2019 Factoring and ing

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FACTORING AND FORFAITING

The main problem nowadays when trading with foreign countries is to obtain paymentsfrom importers. Financing companies offer financial support to traders in exchange for

fees, and guarantees. There are two types of financing forms: factoring and forfaiting. Theyare widely used as alternative financing tools tobanks.

FACTORING

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

discount. Factors provide financing service to small anmedium-sizedcompanies who needcash. For this thefactorcharges a fee equal to a

percentage of the invoices purchased generally 5%. Factoring is a lowvalue short term financing forms. It involves the purchase of invoices, for an

amount less than $10,000 an 90-120 days payment terms. After shippingyour goods or services, thefactorpurchases the invoices, and advancescash 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.

FORFAITING

Forfaiting is the purchase of a series of credit instruments such as drafts, bills of exchange,other freely negotiable instruments on a nonrecourse basis. Nonrecourse means that if the

importer does not pay, the forfeiter cannot recover payment from the exporter.

The exporter gets immediate cash on presentation of relevant documents and the importeris the liable for the cost of the contract and receives credit for x years and at certain percent interest.

The forfaiter deducts interest at an agreed rate for credit period. The debt instruments aredrawn by the exporter, accepted by the importer, and will bear an aval or unconditionalguarantee, issue by the importers bank. The forfeiter takes over responsibility for claimingthe debt from the importer. The forfeiter holds the notes until maturity, or sells them toanother investor. The holder of the notes presents each note to the bank at which they are

payable, as that fall due.

Forfaiting is a high-value medium and long term financing form. It involves the purchaseof negotiable instruments for not less than $100.000 and from six month to five yearspayment terms. The forfeiter needs to know some important information, such as:

who the buyer is and his nationality what goods are being sold
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What is Factoring? :

What is Factoring? Alternatively factoring is a collection and financial service where by receivables are

purchased by the factor and credit sales are converted into cash sales


What is Factoring? Factoring is a powerful financial instrument specially designed to meet the post sales

working capital requirements of the Industrial, Trade & Service sectors It is a portfolio of complementary

financial services


What is Factoring? Factoring is a financial option for the management of receivables In simple definition, it is

the conversion of credit sales into cash In factoring, a financial institution (factor) buys the accounts receivable

of a company (client) and pays up to 80% ( rarely up to 90%) of the bill amount Collection of debt is done

either by the factor or the client depending upon the type of factoring

Factoring Services :

Factoring Services Besides purchase of accounts receivables, a factor may provide a wide range of services

such as: a) Sales Ledger administration b) Debt Collection services c) Credit Information

services d) Advisory services

Loan Vs Factoring :

Loan Vs Factoring The emphasis is on the value of the receivable ( essentially a financial asset), not the firms

credit worthiness Factoring is not a loan, it is the purchase of a financial asset ( the receivable) A bank loan

involves two parties whereas factoring involves three

Non-Recourse Factoring :

Non-Recourse Factoring It is the most comprehensive type of factoring arrangement offering all types of

services namely: Finance Sales Ledger Administration Collection Debt Protection Advisory Services

Non-Recourse Factoring :

Non-Recourse Factoring It gives protection against bad debts to the client In other words, in case the customer

fails to pay, the factor will have no recourse to the client and will have to absorb the bad debts himself It is

popular in developed countries


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Recourse Factoring :

Recourse Factoring In this type of factoring arrangement, the factor provides all types of facilities except debt

protection In other words, the client is responsible for any bad debts incurred It is popular in developing

countries

Invoice Discounting :

Invoice Discounting Invoice discounting is also a variant of factoring Under this, a factor provides finance

against invoices backed by LCs of Banks This enhances clients liquidity by converting credit sales into cash

sales Finance is provided once LC opening bank confirms due date of payment Rate of discount (interest) and

charges are very competitive and in accordance with the market trends

Advance & Maturity Factoring :

Advance & Maturity Factoring In advance factoring, the factor pays a pre-specified portion of the factored

receivables and the balance is paid on collection In maturity factoring, payment is made only on the guaranteedpayment date or on the date of collection

Old Line Factoring :

Old Line Factoring Old line factoring is also known as full factoring as it provides an entire spectrum of

services such as: Collection Credit protection Sales Ledger administration Short term finance It includes all

features of non-recourse and advance factoring

Undisclosed Factoring :

Undisclosed Factoring In undisclosed factoring, the clients customers are not notified of the factoring

arrangement The client himself undertakes sales ledger administration and collection of debts Client has to pay

the amount to the factor irrespective of whether customer has paid or not

Cross Border Factoring / International Factoring :

Cross Border Factoring / International Factoring In the international business transactions, factoring services

are provided by factors of both countries This is known as Cross Border Factoring / International Factoring

Factoring Mechanism :

Factoring Mechanism Client invoices his customer in the usual way-only adding a notification that the invoice

is assigned to and must be paid to a FACTOR Client submits copies of invoices to a FACTOR, accompanied

by the receipted delivery challan or any other valid proof of dispatch


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Benefits of Factoring (Buyers) :

Benefits of Factoring (Buyers) Customers get adequate credit period for payment of assigned debts Customers

save on high bank charges and expenses No Documentation except acknowledgement of the Notification letter

Factors furnish the customers with periodical statement of outstanding invoices factored on them Factoring

does not impinge on their rights vis-a-vis the supplier in respect of quality of goods, contractual obligations,

etc.

Benefits of Factoring (Banks) :

Benefits of Factoring (Banks) Factoring is not a threat to banking, it is a financial service complementary to

that of the banks Factoring improves liquidity of banks borrowers Credit sales are closely monitored by the

Factor and proceeds are routed through the clients accounts with the bank Factoring improves the quality of

advances of banks

International Factoring :International Factoring Under Export Factoring, a factor in India factors export invoices drawn on overseas

buyers and prepays the client an agreed percentage of the invoice value immediately In international factoring,

factoring services are provided by factors of both countries The factor handling the collection of export

receivables of clients (exporters) is called Export Factor (EF) and the factor in buyers country who undertake

collection and credit protection services is called Import factor

International Factoring :

International Factoring In Export Factoring, the Export Factor appoints an Import Factor, who provides credit

protection / exposure limits for a particular importer and only upon such approval the Export Factor provides

financial assistance to the Indian Exporter In view of this there is no requirement of a letter of credit or a creditinsurance cover

Mechanism :

Mechanism The exporter ships the goods to importer. The exporter assigns his invoices through the export

factor to the import factor who assumes the credit risk. (as per prior arrangement). The Export factor prepays

invoices The importer pays the proceeds to the Import factor, who transfers the amount to Export factor The

export factor deducts prepayment already made, other charges and pays the balance proceeds to the exporter

Benefits to Exporters :

Benefits to Exporters Elimination of the cost and delays experienced in transacting business under LC The

import factor offers credit risk protection in case buyer does not pay invoices with in 90 days of due date

ECGC policy cost can be saved. There is reduction is administrative cost as the exporter will be dealing with

only one Export Factor irrespective of the number of countries involved.


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Benefits to Exporters :

Benefits to Exporters The exporter can obtain valuable information on the standing of the foreign buyers on

trade customs and market potential in order to expand his business The following up of receivables by import

factor will speed up the collections Usually, as factors provide finance up to 90% on export invoices, the

exporter has an improved cash flow and his liquidity improves markedly

Benefits to Importers :

Benefits to Importers He can pay invoices in the country locally He deals with the local agency, i.e. the Import

Factor Minimum documentation required The cost of Letters of Credit and delay on account of LCs are

eliminated. All communication is in his own language.

Factoring in India :

Factoring in India

Factoring in India :

Factoring in India

Forfaiting :

Forfaiting The word forfaiting is derived from the French term a forfait which means relinquishing a

right Forfaiting is the discounting of international trade receivable on a 100% "without recourse" basis It is a

form of suppliers credit involving the sale or purchase of receivables falling due at some future date

Forfaiting :

Forfaiting Traditionally, forfaiting is fixed interest rate and medium term (3-5 years) financing Forfaiting is

generally suitable for high value exports like heavy machinery, capital goods, consumer durable, vehicles, bulk

commodities, consultancy and construction contracts and project exports

Forfaiting :

Forfaiting Unlike factoring, forfeiters typically work with the exporter who sells capital goods, commodities,

or large projects from 180 days to up to seven years In forfeiting, receivables are normally guaranteed by the

importers bank, allowing the exporter to take the transaction off the balance sheet to enhance its key financial

ratios


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Characteristics of Forfaiting :

Characteristics of Forfaiting 100% financing without recourse to the seller of the obligation Importer's

obligation is normally supported by a local bank guarantee The debt is typically evidenced by Letter of credit,

Bills of Exchange, Promissory Notes Credit periods can range from 90 days to 10 years

Characteristics of Forfaiting :

Characteristics of Forfaiting Amounts financed to be upwards of USD 2,50,000/- Contract in any of the world's

major convertible currencies can be financed Finance to be either on a fixed (market norm) or floating rate

basis

Benefits :

Benefits Enhances competitive advantage Ability to provide vendor financing making products more attractive

Enables the exporter to do business in risky countries Increases cash flow. Forfaiting converts a credit-based

transaction in to a cash transaction

Benefits :

Benefits Elimination of the following Risks associated with cross border transactions: Commercial Risk - The

risk of non-payment by a non-sovereign or private sector buyer or borrower in his home currency arising from

insolvency Political Risk - The risk of the borrower country government actions, which prevent or delay the

repayment of export credits

Benefits :

Benefits Transfer Risk - The risk of an inability to convert local currency into the currency in which debt is

denominated Interest Risk - The risk of interest rate fluctuations during the credit period of the transaction

Exchange Risk - The risk of exchange rate fluctuations

Factoring - Exercise :

Factoring - Exercise Turnover = Rs. 60 Lacs ( 80% on Credit) Debtors = 1 month to pay Factoring Proposal:

Factor pays 90% of credit sales Factor fee : 2% p.m. Factor commission : 4% of total debts Likely savings of

management cost: Rs 21,600 Avoidance of bad debt : 1% of credit sales

Factoring - Exercise :

Factoring - Exercise Bank Proposal : Advance of 90% of the debts Rate of interest : 18% p.a. Processing fee :

2% of debts

Factoring and ing

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