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FACTORINGREDUCED DEBTS WORRIES

IMPROVED CASH FLOW

Presented by:-

Swati

jimmy

urvashi

shilpa

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INTRODUCTION

Concept Process of factoring Forms of factoring Functions of a factor Factoring vis-à-vis bill discounting Cost and Benefits Factoring in indian context

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CONCEPT OF FACTORING

Factoring is a financial option for the management of receivables.

Factoring, basically involves transfer of the collection of receivables and related bookkeeping function from the firm to a financial intermediary called the FACTOR.

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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 amount immediately on agreement.

Factoring company pays the remaining amount (Balance 20%-finance cost-operating cost) to the client when the customer pays the debt.

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CHARACTERISTICS OF FACTORING Usually the period for factoring is 90 to

150 days. Credit rating is not mandatory. But the

factoring companies usually carry out credit risk analysis before entering into the agreement.

Factoring is a method of off balance sheet financing.

Bad debts will not be considered for factoring.

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Indian firms offer factoring for invoices as low as 1000Rs

Cost of factoring=finance cost + operating cost. Factoring cost vary according to the transaction size, financial strength of the customer etc.

The cost of factoring vary from 1.5% to 3% per month depending upon the financial strength of the client's customer.

For delayed payments beyond the approved credit period, penal charge of around 1-2% per month over and above the normal cost is charged.

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PROCESS OF FACTORING

client customer

factor

credit sales Of goods (1)

Invoice (2)

Submit invoiceCopy(3)Payment up

to 80% intially(4)

Pays the amount(5)

Pay the balance amt(6)

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FORMS OF FACTORING

Recourse and Non recourse factoring Disclosed and undisclosed factoring Advanced factoring Maturity factoring Full factoring Bank participation factoring Cross border factoring

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RECOURSE FACTORING In recourse factoring, client undertakes

to collect the debts from the customer. If the customer don't pay the amount on maturity, factor will recover the amount from the client. This is the most common type of factoring. Recourse factoring is offered at a lower interest rate since the risk by the factor is low. Balance amount is paid to client when the customer pays the factor

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NON RECOURSE FACTORING In non recourse factoring, factor

undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of non recourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization

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Disclosed

In disclosed factoring client's customers are notified of the factoring agreement. Disclosed type can either be recourse or non recourse.

Undisclosed

In undisclosed factoring, client's customers are not notified of the factoring arrangement. Sales ledger administration and collection of debts are undertaken by the client himself. Client has to pay the amount to the factor irrespective of whether customer has paid or not. But in disclosed type factor may or may not be responsible for the collection of debts depending on  whether it is recourse or non recourse.

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FUNCTION OF A FACTOR

Collection Sales ledger administration Credit protection Short term funding Advisory services

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FACTORING VIS-À-VIS BILL DISCOUNTING Factoring and bill discounting are similar

to the extent that both make available finance against the a/c receivables held by client.

So question ??

what difference between these?

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DIFFERENCEBills discounting factoring

Transaction oriented i.e.each bill separately assesed and discounted.

Whereas here a pre payement against all unpaid and not dues invoices.

Discounted bill can be rediscounted severel times befor they mature.

It can not be rediscounted.

Not taking the responsibility of sales Léger admintration and collection of debts.

But here it take all responsibility.

Its usaualy with recourse to the client.

It can be any of type.

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COST AND BENEFITS OF FACTORING There are two types of cost involve:-

1)The factoring commission or service fees

2)The interest on advance granted by the factor to the firm

Factoring has the following benefits:-

1)Instant cash against credit sales

2)Improved cash flow leads to more profit and growth

3)Improved efficiency

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Continue..4)Reduction of current liabilities so

improved in current ratio.

5)More concentrate on manufacturing and marketing.

6)Helps the firm to save cost of credit administration due to the scale of economics and specialization.

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FACTORING IN INDIAN CONTEXT

In 1988,factoring service launched by RBI in India.

Firstly it is started by SBI and Canara bank during the year 1991.

RBI permitted banks to engage in the factoring business as departmental services and through their subsidiaries.

RBI makes it mandatory to get LOD(letter of disclaimer) before proceeding for factoring.

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FACTORING COMPANIES IN INDIA Canbank Factors Limited SBI Factors and Commercial Services

Pvt. Ltd The Hongkong and Shanghai Banking

Corporation Ltd Foremost Factors Limited Global Trade Finance Limited

Export Credit Guarantee Corporation of India Ltd

Citibank NA, India Small Industries Development Bank of

India (SIDBI) Standard Chartered Bank

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EXAMPLE OF SBI FACTOR

SBI factor, a subsidiary of state bank of India is one of the leading factoring company in India with a assets base 700.100cr.

Established in feb,1991. Primary objective to provide domestic

factoring services to SMEs . For design to improve the cash flow

position of SMEs.

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SBI offers

[A] Domestic factoring Recourse factor Non-recourse factor

[B] Export factoring Export factor Import factor

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SUPPOSE…

A small firm has Credit sales:- 80lakh Avg collection period:- 80days Bad debts loss:-1% of credit sales A factor is appointed to by the firm for

that he will receive charge 2%com.and also pay advance against receivable to the firm at interest @18% after with holding 10% as a reserve.

What is annual cost of factoring to the firm?

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Solution; Avg level of

receivables=8,00,000*80/360=17,77,778 Factoring commission=0.02*17,77,778=35,556 And reserve=0.10*17,77,778=1,77,778

Thus, the amount available for advance is:=17,77,778(-)35,556(-)1,77,778

=15,64,444

Factor will also deduct 18%int before paying the advance.

Int=15,64,444*0.18*80/360=62,578

Annual cost of factoring=35,556 +62,578=98134

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THANK YOU

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Sources:- Internet FM book(I M pandey) FS book(M Y khan)