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    Factoring is a financial transaction where a business sells its accounts receivable to a third party called a factor in order to improve its cash flow. Factors provide financing based on the creditworthiness of the debtor rather than the borrower like banks do. Factoring is more expensive than bank loans but provides financing even when banks do not. It allows businesses to convert invoices into immediate cash flow.

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    Factoring is a financial transaction where a business sells its accounts receivable to a third party called a factor in order to improve its cash flow. Factors provide financing based on the creditworthiness of the debtor rather than the borrower like banks do. Factoring is more expensive than bank loans but provides financing even when banks do not. It allows businesses to convert invoices into immediate cash flow.

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    16 views10 pages

    Factoring: Presented By: Hema Gandhi

    Uploaded by

    zaffire
    Factoring is a financial transaction where a business sells its accounts receivable to a third party called a factor in order to improve its cash flow. Factors provide financing based on the creditworthiness of the debtor rather than the borrower like banks do. Factoring is more expensive than bank loans but provides financing even when banks do not. It allows businesses to convert invoices into immediate cash flow.

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    of 10

    FACTORING

    Presented By:
    Hema Gandhi

    What is Factoring?
    Factoring

    is a financial transaction
    whereby a business sells its accounts
    receivable (i.e., invoices) to a third
    party (called a factor) at a discount.
    It is a collection and finance service
    designed to improve the cash flow
    position of the sellers by converting
    sales invoice to ready cash

    Reason.?
    When

    sales increases rapidly,


    debtors too increase rapidly -> too
    many debtors, not enough cash
    When business has to grant longer
    credit periods to customers e.g.
    Exporting businesses

    How is it different from a


    bank loan?
    Factors

    make funds available, when banks do

    not:
    focus-> credit worthiness of the debtor
    Bank lending -> creditworthiness of the
    borrower
    Bank lending is cheaper than factoring
    Factoring is also used as bridge financing
    while the firm pursues venture capital and in
    conjunction with venture capital to provide a
    lower average cost of funds than equity
    financing alone.

    Characteristics

    Usually the period for factoring is 90 to 150 days. Some


    factoring companies allow even more than 150 days.
    Factoring is considered to be a costly source of finance
    compared to other sources of short term borrowings.
    Bad debts will not be considered for factoring.
    Factoring is a method of off balance sheet financing.
    Cost of factoring=finance cost + operating cost. Factoring
    cost vary according to the transaction size, financial
    strength of the customer etc. The cost of factoring vary
    from 1.5% to 3% per month depending upon the financial
    strength of the client's customer.
    Indian firms offer factoring for invoices as low as 1000Rs
    For delayed payments beyond the approved credit period,
    penal charge of around 1-2% per month over and above
    the normal cost is charged (it varies like 1% for the first
    month and 2% afterwards)

    Mechanism
    Purchase

    Order sent to client for goods or


    services provided
    Goods/services provided to customer
    Invoice for Rs1,000 for goods/services sent to
    customer
    Factor notified of Rs1,000 invoice
    Factor advances Rs 800 to client (80% of invoice
    face value) Day 1
    Invoice (Rs 1,000) is paid to factor by customer
    Day 30
    Invoice balance (Rs 180), less 2% factor
    commission, paid to client by factor Day 31

    Types
    Discount/Advance

    Factoring with

    Notification
    Maturity Factoring with Notification
    Non-Notification Factoring
    Non-recourse
    Full Recourse

    Someof the Factors in


    India
    Canbank

    Factors Limited
    SBI Factors and Commercial Services Pvt. Ltd
    Foremost Factors Limited
    Global Trade Finance Limited
    Export Credit Guarantee Corporation of India
    Ltd
    Citibank NA, India
    Small Industries Development Bank of India
    (SIDBI)
    Standard Chartered Bank

    Benefits :
    Better
    Better
    Better
    Better
    Better
    Better

    Cash Flows
    asset Management
    working capital management
    administration
    evaluation
    risk management

    Cost of Factoring:
    Monitory

    Cost

    Fee and Commission


    Advance finance has interests higher than

    normal borrowing
    Non

    Monitory Cost

    Factor tries to minimize risk and delayed

    payment -> loss of prospective sales


    Customer may not be comfortable in dealing
    with a third party/ factor
    Factoring considered as a financial weakness

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