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Financial Services MBA-BM

Financial Services
MBA-BM-2014-16
Session : 12

Factoring & Forfaiting

Factoring.. Concept
Firms sell their invoices i.e. accounts receivables to a factoring company in exchange
for an immediate advance on the invoice

Thereafter, the factor collects the full amount from the debtors and pays the balance
amount due to the business concerns .
This service is usually provided for a fee
Factoring global and Indian scenario
See the following link : https://www.fci.nl/en/about-factoring/statistics

Factoring is a $1 trillion industry worldwide

Factoring Service providers in India:

In India, however, Factoring service is of recent origin. The first factoring company --SBI Factors and Commercial Limited ( SBI FACS) started operations in April,1991.
Factoring has so far played a limited role in business financing.
The factoring turnover in India stands at a mere 0.20% of the global volume.

The following are some of the providers of Factoring services in India currently:
SBI Factors and Commercial Services ( SBI FACS Ltd.)( First factoring company in India,
Started operations since 1991. Is a member of Factors Chain International )
Can bank Factors Ltd.(1992)
Foremost factors Limited ( FFL) (1997)
IFCI Factors limited
India Factoring and Financial Solutions Pvt. Limited
Fullerton India Company ltd.
Yes Bank Factoring Ltd.
Global Trade Finance limited
Export Credit Guarantee Corporation of India Ltd
HSBC Factoring
Citibank Global Transaction Service

Dr Soumya G Deb, XIMB

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Financial Services MBA-BM

Factoring regulation Act 2011


The Factoring Regulation Act 2011, which came into force in February, 2012,
regulates factoring business in India and provided the much-needed legal
framework for factoring in India.

Functions of a Factor

The principal functions that are provided by a factor through a factoring arrangement are
as follows :

1) Frovision of finance :
2) Debt administration :
3) Credit Advisory services :
4) Relieving the client from Credit risk totally:
5) Follow up and collection of Receivables :
Types of Factoring

1) Recourse and Non Recourse Factoring :

2) Advance and Maturity Factoring :


3) Full Factoring

Factoring vs Bill Discounting :


Bill discounting is a process that involves effectively selling a bill to a bank or similar
entity for an amount that is slightly less than the par value and before the maturity date
associated with the bill of exchange. The debtor tenders payment to the new owner of the
discounted bill in the full amount agreed upon originally.
Bill discounting and factoring look similar. Both these services involve
purchasing of receivables, which the clients would have received otherwise at the
end of the credit period. Both services in essence, provide a means of short term
finance against the same. BUT there are some technical differences .

Bill discounting is always with recourse whereas factoring can be with recourse or
without recourse

Bill discounting facility implies only provision of finance but a factor also provides
other services like ledger maintenance and advisory services.

Factoring implies provision of bulk finance against several unpaid trade generated
invoices in batches, bill discounting is usually individual transaction oriented, that is
each bill is separately assessed and discounted.

Dr Soumya G Deb, XIMB

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Financial Services MBA-BM

Bill discounting is in-balance sheet financing, as the transaction gets reflected in the
balance sheet of the client. The amounts of receivables and bank credit ( discounted
amount) are shown as current assets and current liabilities respectively. This is because of
the with recourse nature of the facility.

Factoring , on the contrary , is typically an off balance sheet financing the factoring
transaction removes the accounts receivables and the corresponding liability from the
balance sheet.

Practice Problem 1
X ltd. Has an annual credit sales of Rs. 91 million. Credit terms = 70 days. But based on
the past experience it is seen that the average debt collection period is 108 days. X co. can
obtain an overdraft facility to finance its debtors @17 % per annum. A factor came to X
with the following offer:
The factor can take the task of debt collection and administration and will bring down
the average collection period from 108 days to 70 days. It however specified the
following conditions as well :
Service charge of 1.5% on the receivable value. (LS)
Factor will provide an advance payment of 75% of the receivable value @ an interest cost
of 23% pa.
Out of an internal assessment it was found that because of debt administration service by
the factor, X co would save 32,000/- per month towards administrative cost.
Do a cost benefit analyses to decide whether to go for the factoring or not. Consider 365
days in an year
What should be the number of days to which average collection period be to reverse the
decision?( other things remaining same)
Ans : Not worth it
67.095 approx

Practice problem 2
The Delhi Manufacturers ltd. sells goods on credit. Its current annual credit sales amount to
Rs. 900 lakhs. The credit terms are 2/10 net 30. On the current level of sales the bad debts
are 0.75%. The past experience shows that 50% of the customers avail of cash discount,
while the remaining pay on an average 50 days after the date of sale. The firm currently
finances its receivables in the ratio of 2:1 by a mix of bank borrowings and owned funds
which cost per annum 25% and 28% respectively. Administrative cost of handling the
receivables is 1.50 lakhs per month. As an alternative to the in house management of
receivables, Delhi manufacturers Ltd. is contemplating the use of a full factoring deal with
PNB Factors Ltd. The main elements of such a deal structured by the factor are as follows :
Factor reserve = 15% ( i.e 85% will be paid as advance against receivables)
Guaranteed payment date 24 days after the date of purchase ( by the buyer) ( so they will
do away with 2/10 net 30).
Discount charge ( interest charge on advance) = 22% per annum
Commission for other services payable upfront = 4% of the receivables.
The factor will help the company do away with admin cost for handling receivables.

Dr Soumya G Deb, XIMB

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Financial Services MBA-BM

Assume that the advance forwarded will be the specified percentage of receivables less the
commission, for interest calculation. Assume 360 days in a year. Also, the finance manager
had informed you that with the factor in place, the balance amount of finance, if needed
will be done solely by the own funds of the company.

The finance manager of Delhi Manufacturer Ltd. seeks your advice, as a consultant, on the
cost-benefit of the factoring arrangement. What will be your advice?
Ans : Go for factoring
Savings with factor in place = 3.37 lakhs

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Dr Soumya G Deb, XIMB

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