FACTORING

Dr. Sarbesh Mishra

NICMAR, Hyderabad.
Backdrop
o Working capital gets tied up in the form of
trade debts.
o The average collection period has been on
increase.
o Delays in collection results in liquidity
problems and consequently to delay in
production and supplies.
o Increases the cost of capital, reduces profit
and competitiveness of a company.
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Factor - Meaning
o Factor means “to make or to do” in other
words ‘to get things done’.

o Dictionary meaning of Factor means ‘an

agent’, engaged in financing the operations
of certain companies, through the purchase
of account receivables.

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Definition
o Factoring is an continuous arrangement
between financial institution, (namely the
factor) and a company (namely client)
which sells goods and services to trade
customers on credit.
o Factoring is a service of financial nature
involving the conversion of credit bills into
cash.

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Modus Operandi
oA factoring arrangement (invoice
purchasing arrangement) between client
and the factor, which is the financing
organisation.
o Selling of goods by client results in
preparation of invoices
o Goods are sent to the buyers without
raising the B/E but by invoice.

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Contd….
o The trade debt due by the purchaser to the
client is assigned to the factor.
o Purchaser is required to pay to the factor.
o Client hands over the invoices to the factor
under cover of a schedule of offer along with
copies of invoices.
o Factor makes an immediate up to 80% of the
assigned invoices and balance to be paid on
realisation of the debt.
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Terms and Conditions
o Assignment of debt in favor of factor
o Selling limits for the client
o Conditions within which the factor will
have recourse to the client in case of non-
payment by trade customer
o Details regarding the payment to the factor
for his services
o Limit of any overdraft facility and the rate
of interest to be charged by the factor
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Functions
o Purchase and collection of debts
o Sales ledger management
o Credit investigation and undertaking of
credit risk
o Provision of finance against debts
o Rendering consultancy services

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Types of Factoring
o Non Recourse Factoring
o Recourse Factoring
o Maturity Factoring
o Bulk Factoring
o Invoice Factoring
o Agency Factoring
o International Factoring

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 Factoring Vs. Discounting
I. Covers entire trade debts I.
Only those trade debts
backed by account
II. This is outright purchase of receivable.
trade debts II. Kind of advance against the
III. Non-recourse factoring is bills
also available III. Discounting is always with
IV. It includes several recourse
specialized operations IV. It is only for provision of
V. No such registration is finance
required V. Discounting requires
registration charges with
RoC.
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