FACTORING SERVICES

Factoring is a continuing arrangement between a financial intermediary (Factor) and a business concern (Client) whereby the factor purchases the clients accounts receivables with or without recourse to the client. This relationship enables the factor to control the credit extended to the customer and administer the sales ledger.

A factor may provide wide range of services such as :

A) Credit management & covering the credit

risk. B) Provision of prepayment of funds against the debts if agreed to buy. C) Arrangement for collection of debt. D)Administration of the sales ledger.

TYPES OF FACTORING
Recourse factoring Non recourse factoring Advance and Maturity factoring Old line factoring International Factoring

FACTORING MECHANISM
Customer places an order with the client for
goods or services on credit, client deliver the goods and send invoice to the customer. Client assign invoice to the factor Factor makes prepayment up to 80% and send periodical statements. Monthly statement to customer & follow up Customer make payment to factor. Factor make balance payment on realization to the client.

BENEFITS TO CLIENT
Clients credit sales are immediately
converted into ready cash of around 80% The client can offer better credit terms to buyers. Client is free from the tension of monitoring his sales ledger. Increase in liquidity enables efficient management of working capital Client can expand his business by exploring new markets.

BENEFITS TO CUSTOMERS
Facilitates the credit purchases as the
customer get adequate credit period. Saving on bank charges & expenses. Customer need not to furnish any document. He only undertakes to make the payment of the invoice to the factor. Factoring does not impact on the customers right against supplier in respect of quality of goods & other obligations.

INTERNATIONAL FACTORING

An exporter requires international factoring services to relive him of the problems of collecting receivables in a foreign country with unfamiliarity of customers creditworthiness. Demand for open account trading has increased globally & the exporters have to offer similar terms to remain competitive. A need has arisen for better credit risk protection arising out of importers delaying payments or failing to make the payments.

INTERNATIONAL FACTORING SERVICES International factors provides the following range of services to the exporters: Credit management & bad debts protection. Credit guarantee. Finance up to 90% of the invoice value on shipment. Collection services. Professional sales ledgers and analysis services.

Export receivables that have following characteristics can be factored: Buyers country should be covered by factor. Exporters performance obligation should be complete while presenting invoice for prepayment. There should be multiple shipment or a continuous sales on an ongoing basis with the same buyer. It is best suited for credit periods up to 180 days and are typically provided for open account transactions.

In International factoring there are four parties i.e. Exporter ( Client),Importer (Customer), Export factor and the import factor.

In International factoring no bank is involved . All necessary documentation and RBI formalities are performed by the Export factor who should be an authorized dealer.

 The exporter receive regular order from

an importer & estimate the financing requirement. Exporter provides the export factor with details of customer along with the estimates of credit limit. Export factor forward these details to import factors in the relevent country. On approval of exporters credit limits, exporter enters into agreement with the export factor.

 Exporter ships the goods to Importer. Exporter submits documents such as

invoice , bill of lading etc. to export factor. After scrutiny of the documents export factor makes prepayment to exporter. Export factor forwards the documents to customer under advice to import factor. Import factor collects payment from importer and remits to export factor. On collection export factor credits the balance payment to exporters account.

FACTORING CHARGES
Finance Charges:
Computed on the prepayments outstanding in the clients account at monthly intervals. (Similar to Interest) Service Charges: Nominal charges levied on monthly basis to cover the cost of services namely collection , sales ledger management , periodical MIS reports etc.