FACTORING

 

• FACTORING
• FINANCIAL SERVICES AND MARKETS
• DR. SHASHI AGGARWAL
• INTRODUCTION

1. IN ANCIENT ROME,RICH MANUFACTURERS AND MERCHANTS USED A MERCANTILE AGENT OR FACTOR TO ADMINISTER THEIR SALES OF THEIR MERCHANDISE
2. FROM THE 16 TH CENTURY EXPORTERS OF CONSUMERS GOODS FROM EUROPE SOUGHT THE HELP OF MERCANTILE AGENTS OR FACTORS TO PROMOTE THEIR TRADE
3. SIGNIFICANT DEMAND FOR EUROPEAN MERCHANDISE
4. DEMAND FOR FACTOR GREW AT USA,UK AND FRANCE
5. SPECIALIZED  FINANCIAL INSTITUTES WERE SET UP
6. MAIN FUNCTION : WORKING CAPITAL ASSISTANCE,PHYSICAL POSSESSION OF THE GOODS.SENDING CONSIGNMENT,SORTING THEN,FINDING BUYERS AND SELLING AND RECEIVING PAYMENTS

• MEANING OF FACTORING

1. THE WORD FACTOR HAS BEEN DERIVED FROM THE LATIN WORD”FACERE” WHICH MEANS TO MAKE OR TO DO.
2. IT MEANS THINGS TO GET THINGS DONE
3. FACTOR IS AN AGENT WHO DOES THINGS FOR HIS CLIENT FOR A CONSIDERATION CALLED COMMISSION.
4. IN FACTORING A COMPANY OR FIRM CONVERT ITS RECEIVABLES INTO CASH BY SELLING THEM TO A FACTORING AGENT OR INSTITUTION AT DISCOUNT. THE FACTOR ASSUMES THE RISK OF COLLECTION AND LOSS OF THE DEBT FALLS ON THE FACTOR.
5. IN FACTORING A COMPANY OR FIRM CONVERT ITS RECEIVABLES INTO CASH BY SELLING THEM TO A FACTORING AGENT OR INSTITUTION AT DISCOUNT.
6.  THE FACTOR ASSUMES THE RISK OF COLLECTION AND LOSS OF THE DEBT FALLS ON THE FACTOR.

• DIAGRAM
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• DEFINITION
• V.A AVADHANI,” FACTORING IS A SERVICE OF FINANCIAL NATURE INVOLVING THE CONVERSION OF CREDIT BILLS INTO CASH.
• ACCORDING TO ROBERT W.JOHNSON,” FACTORING IS A SERVICE INVOLVING THE PURCHASE BY A FINANCIAL ORGANIZATION,CALLED A FACTOR,OF RECEIVABLES OWED TO MANUFACTURERS AND DISTRIBUTORS BY THEIR CUSTOMERS,WITH THE FACTOR ASSUMING FULL CREDIT AND COLLECTION RESPONSIBILITIES.
• THE PROCESS

1. FACTORING ARRANGEMENT BETWEEN THE CLIENT AND THE FACTOR (FINANCING ORGANIZATION)
2. CLIENT SELLS GOODS TO TRADE CUSTOMERS ON CREDIT ,HE PREPARES INVOICES IN USUAL WAYS
3. GOODS ARE SENT TO BUYER WITH INVOICE BUT WITHOUT BILL OF EXCHANGE
4. THE DEBT DUE BY THE PURCHASER TO THE CLIENT IS ASSIGNED TO THE FACTOR
5. INVOICES ARE HANDED OVER TO THE FACTOR UNDER COVER OF A SCHEDULE OF OFFER ALONG WITH THE COPIES OF INVOICES AND RECEIPTS DELIVERY CHALLANS/R/R/L/R
6. THE FACTOR MAKES AN IMMEDIATE PAYMENT UP TO 80% OF THE ASSIGNED INVOICES AND THE BALANCE OF 20% WILL BE PAID ON THE REALIZATION OF DEBTS.

• TERMS AND CONDITIONS

1. ASSIGNMENT OF DEBT IN FAVOR OF THE FACTOR
2. SELLING LIMITS TO THE SELLER
3. CONDITIONS WITHIN WHICH WILL HAVE RECOURSE TO THE CLIENT IN CASE OF NON PAYMENT
4. DETAILS OF DISCOUNT
5. INTEREST TO BE ALLOWED TO THE FACTOR ON ACCOUNT WHERE CREDIT HAS BEEN SANCTIONED TO THE SUPPLIER

 

 

• FUNCTIONS
• FACTORING INVOLVES THE FOLLOWING FUNCTIONS:-

1. PURCHASE AND COLLECTION OF DEBTS
2. SALE LEDGER MGMT
3. CREDIT INVESTIGATION AND UNDERTAKING OF CREDIT RISK
4. PROVISION OF FINANCE AGAINST DEBT
5. RENDERING CONSULTANCY SERVICES

• BENEFITS OF FACTORING

1. IMMEDIATE INCREASE IN CASH FLOW
2. LESS COST
3. PROFESSIONAL COLLECTIONS
4. INVOICE PROCESSING
5. OFFERS CREDIT TERMS TO CUSTOMERS
6. SOURCES OF FINANCE
7. INVOICES ARE PAID FASTER
8. CREDIT SCREENING
9. ADEQUATE CASH FLOW

WITH RECOURSE FACTORING

• WITHOUT  RECOURSE FACTORING
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• TYPES OF FACTORING

1. FULL SERVICE FACTORING OR WITHOUT RECOURSE FACTORING

a.    WITH RECOURSE FACTORING

2. MATURITY FACTORING
3. BULK FACTORING
4. INVOICE FACTORING
5. AGENCY FACTORING
6. INTERNATIONAL FACTORING
7. SUPPLIER’S GUARANTEE FACTORING
8. LIMITED FACTORING
9. BUYER BASED FACTORING
10. SELLER BASED FACTORING

• TYPES OF FACTORING
• FULL SERVICE FACTORING OR WITHOUT RECOURSE FACTORING:PROVIDES FINANCE,ADMINISTERS THE SALES LEDGER,COLLECTS THE DEBTS AT HIS RISK AND GIVES CONSULTANCY SERVICES. IF THE DEBTORS FAILS TO REPAY THE DEBTS,THE ENTIRE RESPONSIBILITY FAILS ON THE SHOULDERS OF THE FACTOR. HE CAN NOT PASS ON THIS RESPONSIBILITY TO HIS CLIENT.
• WITH RECOURSE FACTORING:- FACTOR DOES NOT ASSUME THE CREDIT RISK. THE DEBT WHICH ARE NOT RECOVERABLE ASSIGNED BACK TO THE CLIENT.
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• FULL SERVICES FACTORING
• MATURITY  FACTORING:-FACTOR DOES NOT PROVIDE IMMEDIATE CASH PAYMENTS TO THE CLIENT AT THE TIME OF ASSIGNMENT OF DEBTS.
• HE UNDERTAKES TO PAY CASH AS WHEN COLLECTION ARE MADE FROM DEBTORS.
•  THE ENTIRE AMOUNT COLLECTED LESS FACTORING FEES IS PAID TO THE CLIENT. COLLECTION FACTORING
• BULK FACTORING” ALSO KNOWN AS NOTIFIED FACTORING OR DISCLOSED FACTORING.
• FINANCE IS PROVIDED AFTER DISCLOSING THE FACT TO DEBTOR.
• THE WORK RELATING TO SALES LEDGER ADMINISTRATION,CREDIT CONTROL,COLLECTION OF WORK HAS TO BE DONE BY THE CLIENT.
• INVOICE FACTORING:- FACTOR SIMPLY PROVIDES FINANCE AGAINST INVOICES WITHOUT UNDERTAKING ANY OTHER FUNCTIONS
• LIMITED FACTORING: SELECTED INVOICES. FINANCE IS PROVIDED AGAINST SELECTED INVOICES
• AGENCY FACTORING: THE CLIENT LOOK AFTER THE SALES LEDGER ADMINISTRATION AND COLLECTION WORK AND FACTOR PROVIDES FINANCE AND RISK
• INTERNATIONAL FACTORING:-SERVICES OF FACTOR IN DOMESTIC BUSINESS ARE SIMPLY EXTENDED TO INTERNATIONAL BUSINESS. FACTORING IS DONE PURELY ON THE BASIS OF INVOICES PREPARED BY THE EXPORTER.
• DOMESTIC FACTORING : FACTOR,SELLER AND BUYER ALL PARTY OF DOMESTIC
• ADVANCE FACTORING:- ADVANCE AGAINST FACTOR RECEIVABLE AT AN AGREED INTEREST RATE

1. FACTOR PROVIDES ADVANCE AGAINST FACTOR RECEIVABLES AT AGREED INTEREST RATE . RANGES FROM 75 % TO 90 %
2. BALANCE IS PAID AFTER THE COLLECTION IS OVER
3. CLIENT HAS TO PAY INTEREST ON ADVANCE PAYMENTS

 

• SUPPLIER GUARANTEE FACTORING: GOODS ARE SOLD THROUGH MIDDLEMEN. FOR EXAMPLE WHOLE SELLER, MIDDLEMEN ETC. THE BILLS ARE ASSIGNED IN FAVOR OF THE FACTOR N WHO GUARANTEE PAYMENT OF THOSE BILLS.
• LINK FOR LEASING :https://www.gargshashi.com/2020/09/LEASE-FINANCING.html