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VARIOUS FACILITIES TO EXPORTS AND IMPORTS INCLUDING FACTORING 2.pptx

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VARIOUS FACILITIES TO EXPORTS AND IMPORTS INCLUDING FACTORING 2.pptx

  1. 1. VARIOUS FACILITIES TO EXPORTS AND IMPORTS INCLUDING FACTORING AND FORFEITING BY- Shaifali Bhatia Madhur Arora Prince Goel Yajur Tyagi
  2. 2. INTRODUCTION • Forfeiting and factoring are services in international market given to an exporter or seller. • Its main objective is to provide smooth cash flow to the sellers. • The basic difference between the forfeiting and factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is a short termed receivables (within 90 days) and is more related to receivables against commodity sales.
  3. 3. FACTORING • To define, factoring is very simple and can be defined as the conversion of credit sales into cash. • Here, a financial institution which is usually a bank buys the accounts receivable of a company usually a client and then pays up to 80% of the amount immediately on agreement. • The remaining amount is paid to the client when the customer pays the debt • Examples includes factoring against goods purchased, factoring against medical insurance, factoring for construction services etc
  4. 4. Characteristics of Factoring 1. The normal period of factoring is 90150 days and rarely exceeds more than 150 days. 2. It is costly. 3. Factoring is not possible in case of bad debts. 4. Credit rating is not mandatory. 5. It is a method of off balance sheet financing. 6. Cost of factoring is always equal to finance cost plus operating cost.
  5. 5. Different Types of Factoring • Disclosed Factoring: In disclosed factoring, client’s customers are aware of the factoring agreement. Disclosed factoring is of two types: • Recourse factoring: The client collects the money from the customer but in case customer don’t pay the amount on maturity then the client is responsible to pay the amount to the factor. It is offered at a low rate of interest and is in very common use.
  6. 6. • Nonrecourse factoring: In nonrecourse 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 nonrecourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization • In Undisclosed factoring, client's customers are not notified of the factoring arrangement. In this case, Client has to pay the amount to the factor irrespective of whether customer has paid or not.
  7. 7. Facilities of factoring • Immediate cash flow/liquidity: Under the factoring arrangement, the factor pays up to 80% (in some cases even 90%) of receivables within one-two working day of presentation of the invoice. This substantially reduces the average receivable days, leading to improved liquidity and efficient working capital management. • No need for collateral: Many banks require collateral from small businesses. However, most factoring companies don’t need collateral as the receivables, and the buyers are duly audited and the financial institution assumes the risk.
  8. 8. • Focus on core activities: Factoring saves time and the cost of collecting customers’ receivables. This makes it a good solution for small businesses. The factor provides all services related to sales ledger management, collection of account receivables, credit control and protection, etc., enabling the company to concentrate on its core competencies more efficiently. • A sale, not a loan: Factoring isn’t a loan and doesn’t create any liability on the balance sheet. This is in stark contrast to a bill discounting service where the discounted bills are simply used as collateral against the loans.
  9. 9. Advisory services: • Factors need to recover dues from buyers in several other countries that their exporters regularly ship. So, they are generally aware of the potential risks of dealing with a buyer or a specific region. • In several cases, a factor offers various advisory services to its clients, including credit assessment for overseas buyers. This helps the exporter to learn more about the customer and to negotiate better terms and conditions for the business. In cases where the factor rejects the application due to a poor record or risky importer, the factor will keep the exporter informed about the dangerous trade. • This helps the exporter avoid such transactions and engage only with verified and legitimate buyers. Some factors also have experts on their team who advise exporters on the finer technical aspects of a client’s business.
  10. 10. Protection from bad debts: If a client chooses non-recourse factoring, the factor assumes the risk of bad debts. So, the exporter can focus on growing the business with the unlocked capital instead of worrying about getting paid. However, in non-recourse factoring, the cost competitiveness aspect of the financing mechanism is slightly compromise
  11. 11. Cost competitive: • Since factoring is a very competitive industry, costs are usually reasonable, making it a cost-effective way of managing the sales ledger functions. This is especially the case with recourse-based factoring. • As mentioned earlier, Non-recourse financing options can be slightly more expensive. However, for the exporter, the risk associated with the transaction is also commensurate with the cost.
  12. 12. Easy and Fast • It is widely considered one of the most significant merits of factoring. Exporters with scalable, growing, and profitable business ventures generally need working capital quickly and not necessarily at a lower cost. • Business exigencies require a growing export company to be quick and agile. This is possible only with fast financing as traditional bank loans have painfully long procurement channels. Moreover, the application required to establish a factoring relationship is much simpler than other types of financing
  13. 13. FORFEITING • Forfaiting is originally a French word, meaning to relinquish a right. • Forfaiting is the provision of medium-term financial support for the import and export of capital goods. • Major sources of export financing are working capital financing, countertrade, factoring, and forfaiting. • Forfaiting is a mechanism where the exporter surrenders his rights to receive payment against the goods and services rendered to the importer, in exchange for a cash payment from the forfeiter
  14. 14. Characteristics of a Forfaiting Transaction The common characteristics of a forfaiting transaction could be: • The minimum bill size is either $250,000 or $500,000 • The length of credit extended to the importer ranges from six months to seven years • It is receivable in any major convertible currency, e.g., USD, CAD, EUR, etc. • A contract for goods and services • A written letter of credit or a guarantee is made by a bank, usually in the importer’s country
  15. 15. THE FORFAITER REQUIRES THE FOLLOWING INFORMATION TO PARTICIPATE IN THE TRANSACTION: • The identity of the buyer • Buyer’s nationality • Nature of goods sold • Detail of the value • Currency of contract • Date and duration of the contract • Credit terms • Payment schedule • Interest rate • Know what evidence of debt will be used, e.g., promissory notes, bills of exchange, letter of credit, etc. • The identity of the guarantor of payment
  16. 16. HOW FORFEITING WORKS IN INTERNATIONAL TRADE? • The exporter and importer negotiate according to the proposed export sales contract. • Then the exporter approaches the forfeiter to ascertain the terms of forfeiting. • After collecting the details about the importer, and other necessary documents, forfeiter estimates risk involved in it and then quotes the discount rate.
  17. 17. • The exporter then quotes a contract price to the overseas buyer by loading the discount rate and commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter. • Export takes place against documents guaranteed by the importer’s bank and discounts the bill with the forfeiter and presents the same to the importer for payment on due date.
  18. 18. Benefits to Exporter • 100 per cent financing : Without recourse and not occupying exporter's credit line That is to say once the exporter obtains the financed fund, he will be exempted from the responsibility to repay the debt. • Improved cash flow : Receivables become current cash in flow and its is beneficial to the exporters to improve financial status and liquidation ability so as to heighten further the funds raising capability. • Reduced administration cost : By using forfeiting , the exporter will spare from the management of the receivables. The relative costs, as a result, are reduced greatly. • Advance tax refund: Through forfeiting the exporter can make the verification of export and get tax refund in advance just after financing. • Risk reduction : forfeiting business enables the exporter to transfer various risk resulted from deferred payments, such as interest rate risk, currency risk, credit risk, and political risk to the forfeiting bank. • Increased trade opportunity : With forfeiting, the export is able to grant credit to his buyers freely, and thus, be more competitive in the market
  19. 19. DOCUMENTARY REQUIREMENTS • Invoice : Forfeiting discount, commitment fees, etc. needs not be shown separately instead, these could be built into the FOB price, stated on the invoice. • Shipping Bill and GR form : Details of the forfeiting costs are to be included along with the other details, such FOB price, commission insurance, normally included in the "Analysis of Export Value "on the shipping bill. The claim for duty drawback, if any is to be certified only with reference to the FOB value of the exports stated on the shipping bill.
  20. 20. THANK YOU

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