Types Of Factoring, Factors and their Functions, Working Capital Management.

1. Working Capital
Management
FIN353
Factoring and Forfaiting

2. Factoring: The Concept…
• “Factor is a financial intermediary which assumes the
responsibility of collection of receivables arising out of
credit sales of their clients and in return charges
commission for its services”.
• So, a Factor is…
ü A Financial Intermediary/Institute/Company
ü That buys invoices of a manufacturer or a trader, at a
discount, and
ü Takes responsibility for collection of payments.

3. Factoring: The Concept…
• “Factoring is the Sale of Book Debts by a firm
(Client) to a financial institution (Factor) on the
understanding that the Factor will pay for the Book
Debts as and when they are collected or on a
guaranteed payment date. Normally, the Factor
makes a part payment (usually upto 80%)
immediately after the debts are purchased
thereby providing immediate liquidity to the
Client”.

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Factoring Services - Concept
Client Customer
Factor
Order placed
Deliver of goods
Client submits invoice
Factor-Prepayment
Monthly statements
Customer pays

5. Process of Factoring:
• Client makes a credit sale with a customer.
• Client sells the customer’s account to the Factor and notifies
the customer.
• Factor makes partly payment (advance) against account
purchased, after adjusting for commission and interest on
the advance.
• Factor maintains the customer’s account and follows up for
payment.
• Customer remits the amount due to the Factor.
• Factor makes the final payment to the Client when the
account is collected or on the guaranteed payment date.

6. Charges for Factoring Services:
• Factor charges Commission (as a flat percentage of value of
Debts purchased) (0.50% to 1.50%)
•
• Commission is charged up-front.
•
• For making immediate partly payment, interest charged.
Interest is higher than rate of interest charged on
Working Capital Finance by Banks.
•
• If interest is charged up-front, it is called Discount.

7. Functions of a Factor:
1. Administration of sales ledger
- Maintains the client’s sales ledger
- Gives periodic reports
- Current status of his receivables
- Receipts of payments from customers
- Customer-wise record of payments
- Change in payment pattern
2. Provision of collection facility
- Undertakes to collect receivables on behalf of the client
- Relieving the clients from problems involved in collection
- Enables the clients to reduce cost of collection

8. Functions of a Factor: CONT…
3. Financing Trade Debts:
4. Credit Control And Credit Protection:
- This service is provided where debts are factored
without recourse. Factor assumes the risk of default.
5. Advisory Services:
- Specialized knowledge and experience
- Customers’ perception
- Change in marketing strategies
- Emerging trends

9. Types / Forms of Factoring:
1. Recourse Factoring:
ü Factor does not assume credit risks associated with
receivables.
ü Credit Risk is borne by the Client.
ü In India, Factoring is done with recourse.
2. Non-Recourse Factoring:
ü Factor assumes credit risks associated with receivables.
Charges a higher commission
ü Credit risk is assumed by Factor
ü In USA/UK, Factoring is commonly done without recourse.

10. Types / Forms of Factoring:
3. Advance Factoring:
ü Factor pays a specified portion (75% to 90%) in advance.
ü Balance being paid upon collection from the customer. The
client has to pay interest on advance payment.

11. Example of Advance Factoring Mechanism:

12. Types / Forms of Factoring: CONT…
4. Maturity Factoring / Collection Factoring:
ü Factor does not make any advance payment to the Client.
ü Factor Pays on date of collection/agreed future date.
ü Less RISK for Factor and charges nominal commission.
5. Full Factoring / Old Line Factoring:
ü Features of almost all the factoring services.
ü Entire spectrum of services; collection, credit protection, sales
ledger administration, short-term finance.

13. Types / Forms of Factoring: CONT…
6. Disclosed Factoring:
ü Name of factor is disclosed in sales invoice.
7. Undisclosed Factoring:
ü Name of factor is NOT disclosed in sales invoice.
8. Domestic Factoring:
ü Buyer, Seller, Factor domiciled in the same
country.

14. Types / Forms of Factoring: CONT…
9. Export / Cross Border / International Factoring:
ü Usually Four Parties Involved Viz. the Exporter, Importer,
Export Factor, Import Factor.
ü Two Agreements.
ü Import Factor Provides Link Between Export Factor and
Importer.
ü Import factor underwrites customer trade credit risk, collects
receivables and transfers fund to export factor.

15. International Factoring Transactions:

16. Advantages of Factoring:
1. Off-balance Sheet Finance
2. Reduction of Current Liabilities
3. Improvement in Current Ratio
4. Higher Credit Standing:
5. More time for Planning and Production
6. Reduction of Cost and Expenses
7. Additional Source of Finance

17. WHY FACTORING HAS NOT BECOME POPULAR IN INDIA?
• Banks’ unwillingness to provide factoring services
• Problems in recovery.
• Factoring requires assignment of debt which attracts Stamp
Duty.
• Cost of transaction becomes high.
• Lack of awareness.
•

18. Factoring in INDIA: Major Players
• SBI Factors and Commercial Services Pvt. Ltd.
• Canbank Factors Limited
• Global Trade Finance Limited
• Foremost Factors Limited
• HSBC Bank
• CITI Bank NA, India
• Standard Chartered Bank
• SIDBI
• ECGC Ltd.
•

19. FORFAITING: THE CONCEPT
- “Forfeiting refers to financing of receivables pertaining to
international trade”.
- Forfaiting is a mechanism by which the right for export
receivables of an exporter (Client) is purchased by a
Financial Intermediary (Forfaiter) without recourse to him.
- Converts exporter’s credit sale into cash sale.
- Discounting the documents covering the entire risk of non-
payment in collection.
- Credit period can range from 3 to 5 years.

21. Characteristics of Forfaiting:
• Converts Deferred Payment Exports into cash transactions,
providing liquidity and cash flow to Exporter.
• Discharge Exporter from Cross-border Political OR Exchange
Risk associated with Export Receivables.
• Finance available upto 100% (as against 75 - 80% under
conventional credit) without recourse.
• Acts as additional source of funding and hence does not have
impact on Exporter’s borrowing limits. It does not reflect
as debt in Exporter’s Balance Sheet.
• Provides Fixed Rate Finance and hence risk of interest rate
fluctuation does not arise.

22. Characteristics of Forfaiting: Cont…
• Exporter is freed from credit administration.
• Simple Documentation as finance is available against bills.
• Forfait financer is responsible for each of the Exporter’s trade
transactions. Hence, Export business can be done more
efficiently.
• Forfait transactions are confidential.
•

23. FORFAITER’S CHARGES
• The DISCOUNT charged by the Forfaiter depends upon:
•
üCost of Forfaiting
üMargin to cover risk
üManagement charges
üFees for delayed payment
üPeriod of Forfaiting contract
üCredit rating of Avalling Bank
üCountry/Currency Risk of the importer

24. Export Factoring V/s Forfeiting:
●Sr.
No.
●Export Factoring ●Forfaiting
●1 ● 75 to 90% Financing ● 100% Financing
●2 ● Financing, Collection, Sales
● Ledger Administration
● Pure Financing
●3 ● Short Term Financing ● 3 To 5 Years
●4 ● Does not guard against
● Exchange Rate Fluctuation
● Forfaiter guards.

25. FACTORING vs. FORFAITING
POINTS OF
DIFFERENCE
FACTORING FORFAITING
Extent of
Finance
Usually 75 – 80% of the
value of the invoice
100% of Invoice
value
Credit
Worthiness
Factor does the credit
rating in case of non-
recourse factoring
transaction
The Forfaiting Bank
relies on the
creditability of the
Availing Bank
Services
provided
Day-to-day
administration of sales
and other
allied/advisory services
No services are
provided

26. FACTORING vs. FORFAITING – CONT…
POINTS OF
DIFFERENCE
FACTORING FORFAITING
Recourse With or without recourse Always without recourse
Size of transaction●Usually no restriction
on minimum size of
transactions that can
be covered by
factoring.
●Transactions should
be of a minimum
value of USD 250,000.
Scope of service ●Service is available for
domestic and export
receivables.
●Usually available for
export receivables
only denominated in
any freely convertible
foreign currency.

27. WHY FORFAITING HAS NOT DEVELOPED…
• Relatively new concept in India.
• High Rupee Fluctuation
• High cost of funds
• High minimum cost of transactions (USD 250,000/-)
• RBI Guidelines are unclear.
• Very few institutions offer such services in India. Exim Bank
is one of the major player and very few other co’s
involved.
• Lack of awareness.

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List of some Forfaiters:
• Standard Bank, London
• Hong Kong Bank
• ABN AMRO Bank
• Meghraj Financial Services
• Triumph International Finance India Ltd.,
• Natwest Bank
• Meridian Finance Group