Factoring

A financing method in which a Financier buys debt or invoice from another company, so basically seller surrenders accounts receivable at a discount to a factor (Financer) to raise capital. Upto 80% of account receivables can be discounted with factoring services. The biggest advantage of Factoring is that it is an out-of-balance sheet product and it does not create liability on balance sheet.So a Factor is :-A Financial Intermediary Buys invoice/book debts Take responsibility of collection of paymentsParties involvedSeller Debtor/Buyer Financial Institution ( Lender) Types of Factoring:Recourse Factoring:- Factoring with recourse, as the name suggests. In case of non payment of invoice, liability of paying of discounted amount from Factor will still be with the seller.Non Recourse Factoring :- Under this facility, Factor not only discounts bills, but also provides guaranteed credit protection. In case of non payment, Factor will bear the risk of bad debts.Maturity Factoring:- In Maturity Factoring, the Factor agrees to pay amount to exporter/seller on the agreed date.Cross Border Factoring: - Also referred to as two Factor system of factoring, it is almost similar to domestic factoring, except that 4 parties are involved. They are:Exporter Export Factor ImporterImport Factor Client (Exporter) enters into arrangement with Export factor in his country & delegates export receivables to him. Export Factors enters into arrangement with Import Factor & organises for credit evaluation & collection of payment for an agreed fee.Import factor collects payment from Importer and remits it to export factor , which in turn passes credit to exporter.Advantage of Factoring:1. Factoring helps to improve the current ratio,  which in turn adds liquidity to the company. This reduces working capital cycle gap.  Seller therefore can offer better credit terms and increase orders.2. Increase in the turnover of stocks. Since the cash recovery is fast, overall topline of company increases.3. It ensures prompt payment and reduction in debt.4. It helps with credit protection.5. Reduces work of collection/recovery department.Responsibility of collecting the dues solely lies with ‘Factor’/Financer.Cost involved:-Commission/Fees of 0.5-1.5% for rendering factoring services Interest Cost for discounting is charged for the specified tenor debt receivable usually varies between 10-12%.More can be read on associated links as below https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10125
Saurabh Jain
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Factoring

Saurabh Jain
Blog
29th Aug, 2017
Factoring

A financing method in which a Financier buys debt or invoice from another company, so basically seller surrenders accounts receivable at a discount to a factor (Financer) to raise capital. Upto 80% of account receivables can be discounted with factoring services. The biggest advantage of Factoring is that it is an out-of-balance sheet product and it does not create liability on balance sheet.

So a Factor is :-

  1. A Financial Intermediary

  2. Buys invoice/book debts

  3. Take responsibility of collection of payments

Parties involved

  1. Seller

  2. Debtor/Buyer

  3. Financial Institution ( Lender)

Types of Factoring:

  • Recourse Factoring:- Factoring with recourse, as the name suggests. In case of non payment of invoice, liability of paying of discounted amount from Factor will still be with the seller.

  • Non Recourse Factoring :- Under this facility, Factor not only discounts bills, but also provides guaranteed credit protection. In case of non payment, Factor will bear the risk of bad debts.

  • Maturity Factoring:- In Maturity Factoring, the Factor agrees to pay amount to exporter/seller on the agreed date.

  • Cross Border Factoring: - Also referred to as two Factor system of factoring, it is almost similar to domestic factoring, except that 4 parties are involved. They are:

  1. Exporter

  2. Export Factor

  3. Importer

  4. Import Factor

Client (Exporter) enters into arrangement with Export factor in his country & delegates export receivables to him. Export Factors enters into arrangement with Import Factor & organises for credit evaluation & collection of payment for an agreed fee.

Import factor collects payment from Importer and remits it to export factor , which in turn passes credit to exporter.

Advantage of Factoring:

1. Factoring helps to improve the current ratio,  which in turn adds liquidity to the company. This reduces working capital cycle gap.  Seller therefore can offer better credit terms and increase orders.

2. Increase in the turnover of stocks. Since the cash recovery is fast, overall topline of company increases.

3. It ensures prompt payment and reduction in debt.

4. It helps with credit protection.

5. Reduces work of collection/recovery department.Responsibility of collecting the dues solely lies with ‘Factor’/Financer.

Cost involved:-

  1. Commission/Fees of 0.5-1.5% for rendering factoring services

  2. Interest Cost for discounting is charged for the specified tenor debt receivable usually varies between 10-12%.

More can be read on associated links as below

https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10125

Saurabh
Blog Author

 

One of the Co-founders, Saurabh serves as an active advisor to several SaveDesk’s portfolio companies and also works closely with them to improve business performance, select key management personnel, ensuring statutory and financial oversight and compliance supported by various agreements.Prior to SaveDesk, Saurabh spent seven years with Standard Chartered Bank commercial banking team as an associate director, where he was responsible for client management,financial analysis, portfolio management and large ticket deal’s execution in South India. Saurabh holds an MBA in Marketing from the Institute of Technology Management, and graduated with Honors degree in Electrical and Electronics Engineering from RGPV, Madhya Pradesh

 

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