The receivables constitute a significant portion of current assets of a firm. But, for investment in receivables, a firm has to incur certain costs such as costs of financing the receivables and costs of collection from the receivables. Further there is a risk of bad debts also.
Trang 1Revise Lecture 13
Trang 2Financial Services
Trang 3Factoring
Trang 4Financial services
Factoring:
- The receivables constitute a significant
portion of current assets of a firm
- But, for investment in receivables, a firm has to incur certain costs such as costs of
financing the receivables and costs of
collection from the receivables
- Further there is a risk of bad debts also.
Trang 5Financial services
Factoring:
- Itis, therefore, very essential to have a
proper control and management of
Trang 6Financial services
Factoring:
* Asmall firm may handle the problem of
receivables management of Its own, but It may not be possible for a large firm to do
SO efficiently as it may be exposed to the risk of more and more bad debts
- In such a case, a firm may avail the
services of specialied institution engaged
In receivables management, called
factoring firms.
Trang 7Financial services
Factoring:
* Factoring may broadly be defined as the relationship created by an agreement
between the seller of goods / services and
a financial institution, called the factor
* Factoring may also be defined asa
continuous relationship between a
financial institution ( the factor) anda
business concern selling goods / service
(the client) to a ttade customer on an open
Trang 8Financial services
Factoring:
- The term factoring has been defined In
various countries in different ways due to non-availability of any uniform codified law
- Factoring means an arrangement between
a factor and his client which includes at
least two of the following services to be
provided by the factor;
Trang 9Financial services
Factoring:
1 Finance for the supplier including loans
and advance payments
2 Maintenance of accounts, ledgers relating
to receivables
3 Collection of debts
4 Protection against credit risks In
payments by debtors
Trang 10‘ Features of Factoring
Trang 11Financial services
Features of Factoring:
1 Factoring Is a service of financial nature
Involving the conversion of credit bills into cash Accounts receivables, bills
recoverables and other credit dues
resulting from credit sales appear in the books of account as book credits
» The risks associated with credit are taken
over by the factor which purchases these
credit receivables without recourse and
Trang 13Financial services
Features of Factoring:
4 Factor acts as another financial
Intermediary between the buyer and the
seller
5 Unlike a bank, a factor specializes in handling and collecting receivables in an efficient manner The factor receives the payments directly since the Invoices are assigned in favour of It
Trang 14Lecture 14
Trang 15Mechanism of Factoring
Trang 16Financial services
Mechanism of Factoring:
- The factoring business is generated by
credit sales in the normal course of
‘ Thus, the factor acts as an intermediary
LA AHAIM-ANH thn anilrar and thn niinhaacnr
Trang 17Financial services
Mechanism of Factoring:
- The mechanism of factoring is Summed up
as the following;
An agreement Is entered into between
the selling firm and the buying firm
2 The sales documents should contain the
Instructions to make payments directly to the factor who Is assigned the job of
collection of receivables.
Trang 18Financial services
Mechanism of Factoring:
3 When the payment is received by the
factor, the account of the firm is credited by the factor deducting Its fee, charges, Interest etc as agreed upon
4 The factor may provide advance finance
to the selling firm if the conditions of the
agreement so require
Trang 19‘ Parties to the Factoring
Trang 20Financial services
Parties to the Factoring
- There are basically three parties involved
In a factoring transactions:
The buyer of the goods
2 The seller of the goods
3, The factor, |.e the financial institution
- The three parties interact with each other during the purchase / sale of goods
Trang 21Financial services
Parties to the Factoring — The Buyer
1 Enters into an agreement with the seller
and negotiates the terms and conditions for the purchase of goods on credit
Takes the delivery of the goods along
with the invoice bill and instructions from the seller to make payments to the factor
on due date
Will make payments to the factor In time
nracl) far nvtrnnainn nf timn
Trang 22Financial services
Parties to the Factoring — The seller
1 Enters into contract for the sale of goods
on credit as per the purchase order sent
by the buyer stating various terms and
conditions
Sends copies of invoice, and delivery
challan along with the goods to the buyer and gives instructions to the buyer to
make payment on due date
Trang 23Financial services
Parties to the Factoring — The Seller
3 Sells the receivables received from the buyer to a factor and receives 80% or more
of the payment in advance
4 Receives the balance payment from the factor after paying the service charges
Trang 24Financial services
Parties to the Factoring — The Factor
1 Enters into an agreement with the seller
for rendering factor services, L.e
collection of receivable / debts
Pay 8-% or more of the amount of
receivables
Sends copies of sale documents
Receives payments from the buyer on
due date and pays the balance money to
Trang 25‘ Types of Factoring
Trang 26Financial services
Types of Factoring:
* Anumber of factoring arrangements are
possible depending upon the agreement reached between the selling firm and the factor
- The most common feature of practically all the factoring transactions Is collection of receivables and administration of sale
ledger
Trang 27Financial services
Types of Factoring:
1 However, the following are some of the
important types of factoring
arrangements;
Recourse and non-recourse factoring Advance and maturity factoring
Conventional or full factoring
Domestic and export factoring
Trang 28Financial services
Types of Factoring:
Selected seller based factoring
8 Selected buyer based factoring
9 Disclosed and undisclosed factoring
Trang 29‘ Let the risk of bad debt Is to be borne by
the client and the factor does not assume credit risks associated with the
receivables.
Trang 30by the factor and he cannot claim this
amount from the selling firm
- Since here he bears the risk of non-
payment, commission or fee charged for
the services is higher than that under the