FACTORING MEANING 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. In "advance" factoring, the factor provides financing to the seller of the accounts in the form of a cash "advance," often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor's discount fee (commission) and other charges, upon collection from the account client. In "maturity" factoring, the factor makes no advance on the purchased accounts; rather, the purchase price is paid on or about the average maturity date of the accounts being purchased in the batch. Factoring differs from a bank loan in several ways. The emphasis is on the value of the receivables (essentially a financial asset), whereas a bank focuses more on the value of the borrower's total assets, and often also considers, in underwriting the loan, the value attributable to non-accounts collateral owned by the borrower. Such collateral includes inventory, equipment, and real property,[1][2] That is, a bank loan issuer looks beyond the credit-worthiness of the firm's accounts receivables and of the account debtors (obligors) thereon. Secondly, factoring is not a loan it is the purchase of a financial asset (the receivable). Third, a nonrecourse factor assumes the "credit risk", that a purchased account will not collect due solely to the financial inability of account debtor to pay. In the United States, if the factor does not assume credit risk on the purchased accounts, in most cases a court will recharacterize the transaction as a secured loan.

RISK The most important risks of a factor are:

Counter party credit risk related to clients and risk covered debtors. Risk covered debtors can be reinsured, which limit the risks of a factor. Trade receivables are a fairly low risk asset due to their short duration. External fraud by clients: fake invoicing, mis-directed payments, pre-invoicing, not assigned credit notes, etc. A fraud insurance policy and subjecting the client to audit could limit the risks. Legal, compliance and tax risks: large number of applicable laws and regulations in different countries. Operational risks, such as contractual disputes. Uniform Commercial Code (UCC-1) securing rights to assets. IRS liens associated with payroll taxes etc. ICT risks: complicated, integrated factoring system, extensive data exchange with client.

The cost of factoring and invoice discounting

The costs of factoring and invoice discounting can change depending on the company offering the service, and are often negotiable. It is a good idea to consider several suppliers, and compare the:

discount charges (interest) offered service or management fees any additional costs - eg for additional services such as credit protection notice period for ending the service - most providers require three months' notice, but some have notice periods of up to a year which could be expensive for your business

Discount charges Discount charges work in exactly the same way as bank interest. Typical charges range from 1.5 per cent over base rate to 3 per cent over base rate. The discount charge is calculated on a daily basis and usually applied monthly. Credit management fees There will be a fee for credit management and administration. The amount will depend on your turnover, the volume of your invoices and the number of customers you have. Typical fees range from 0.75 per cent of turnover to 2.5 per cent of turnover. For invoice discounting, fees are typically lower than for factoring because you will still collect and manage debts yourself. They generally range from 0.2 per cent to 0.5 per cent of turnover. These fees are less because the level of service provided is significantly lower than with factoring. Credit protection charges These will be levied in non-recourse factoring arrangements, where the factor is liable for any bad debts. The amount will largely depend on the factor's assessment of the level of risk. Typical charges range from 0.5 per cent of turnover to 2 per cent of turnover Export factoring Some factoring companies offer a facility for the financing of international sales. They will typically work with a partner abroad who will be responsible for the collection of payment in the country to which you export. The services of a local agent will prevent any problems that could arise because of differences in laws, customs, language and time differences. In terms of credit limits and process, there is no material difference between local and international factoring. Some factors will offer you the choice of being paid in sterling or in another currency. You should carefully evaluate which is to your advantage. If your customer insists on being invoiced in their country's currency, consider investing in protection against currency fluctuations. Factors may approve a lower level of prepayment for export invoices than for local sales.

10 Benefits to Factoring Cash flow is key for your businesss growth and success in 2012. When banks say no, factoring is a great option to receive cash for your business and receive it quickly! More and more businesses are utilizing factoring to grow their business. It is important to understand the benefits of factoring and know the difference between selling an asset (invoices) and obtaining a loan from a bank. Here are 10 benefits to factoring accounts receivable: 1. Get your cash quickly in most cases within 24 hours. 2. No long term contracts not locked in a contract for 6 months, 1 year, or longer. 3. No cash use restriction unlike a bank loan or line of credit, you can use cash funded to you for any reason. 4. No minimum Pick and choose how many invoices you want to submit for factoring. 5. Not take on debt factoring allows you to get cash with out incurring debt. 6. Reduce or eliminate debt improve the ability to pay your bills down or pay them off. 7. Company financials not required factoring is not determined by the state your companys financial reports and is not required. 8. New and non-bankable businesses welcome factoring helps businesses with little or no credit history. 9. Low fee factoring fees are very low typically 5%. 10. Reduce or eliminate stress no more worrying about when you are going to get paid and how youre going to pay your bills. Some of the great benefits to Factoring are as follows: Improve Cash Flow without adding debt:

. Receive cash for your outstanding invoices . Meet tax requirements on time . Purchase capital equipment . Market for additional business . Utilize increased cash flow to increase market share

. Pay your suppliers faster and take advantage of discounts

Improve Customer Credit Services:

. Reduce bad debt . Streamline credit approvals for new customers . Improve decision-making on new business . Reduce administration costs . Accounts Receivable Management

Take Advantage of the Flexibility

. Factor as much as your want or as little as you want. . There are no minimums and no maximums in the amount you can factor. . Funding is based on the financial strength of your customers. Factoring process

FUNCTIONS Purchase and collection of debt Sales ledger management Credit investigation and undertaking of credit risk Provision of finance against debts Rendering consulting services

TYPES OF FACTORING

Recourse and Non-recourse Factoring

Under a recourse factoring arrangement, the factor has

recourse to the client (firm) if the debt purchased/receivables factored turns out to be irrecoverable. If the customer defaults in payment, the client has to makes good the loss incurred by the factor. The factor charges the client for maintaining the sales ledger and debt collection services and also for the interest for the period on the amount drawn by the client. The factor does not have the right of recourse in the case of non-recourse factoring. The loss arising out of irrecoverable receivables is borne by him, as a compensation which he charges a higher commission. Advance and Maturity Factoring A drawing limit, as a pre-payment, is made available by the

factor to the client as soon as the factored debts are approved. The client has to pay interest on the advance between the date of such payment and the date of actual collection from the customers. The maturing factoring is also known as Collection factoring. Under such arrangements, the factor does not make a pre-payment to the client. The payment is made either on the guaranteed payment date or on the date of collection. Full Factoring This is the most comprehensive form of factoring combining the features of almost

all the factoring services specially those of non-recourse and advance factoring. Full factoring provides the entire spectrum of services (collection, credit protection, sales ledger administration and short term finance). Disclosed and Undisclosed Factoring In disclosed factoring, the name of the factor is disclosed in the invoice by the supplier-manufacturer of the goods asking the buyer to make payment to the

factor. The supplier may continue to bear the risk of non-payment by the buyer without passing it on to the factor. The name of the factor is not disclosed in the invoice in undisclosed factoring although the factor maintains the sales ledger of the supplier manufacturer. The entire realization of the business transaction is done in the name of Supplier Company but all control remains with the factor. He also provides short-term finance against sales invoice. Domestic and Export/Cross-Border/International Factoring In the domestic factoring, the three

parties involved, namely, customer(buyer), client(seller-supplier) and factor (financial intermediary) are domiciled in the same country. The process of export factoring is almost similar to domestic factoring except in respect of the parties involved. There are usually four parties involved in cross-border factoring transaction. They are: exporter (client), importer (customer), export factor and import factor.

FACTORING SERVICES IN INDIA Though factoring services have been introduced since 1991 in India still it is quite new in the sense that factoring product is not widely known in many parts of the country. Recognizing the utility of factoring services for small and medium size industrial and commercial enterprises in India, for the first time the Vaghul Committee which submitted its report on the Money Market, recommended the development of a system of factoring of open account sales particularly for the small scale industrial units. This committee further observed that both banks and non-bank financial institutions in the private sector should be encouraged to set up institutions for providing factoring services. Later, the Kalyanasundaram Committee, which was appointed by the Reserve Bank of India (RBI) in 1988 specifically for exploring the possibilities of launching factoring services in India, found an abundant scope for such services and hence strongly advocated for the introduction of factoring services in India. This committee also observed that banks were ideally suited for providing factoring services to the industries in the economy. However, the said Committee expressed the view that to begin with only four or five banks either individually or jointly should be allowed on zonal basis to undertake factoring services. The recommendations of Kalyanasundaram Committee were accepted by the RBI. Subsequently a suitable amendment

was made in the Banking Regulation Act 1949, so as to allow banks to set up subsidiary company for undertaking factoring services. To begin with, the RBI permitted both the State Bank of India and Canara Bank to start factoring services through their own subsidiaries. Accordingly, two factoring companies in India, i.e. SBI Factors and Commercial Services Ltd. and Canbank Factors Ltd; sponsored by the State Bank of India and Canara Bank respectively, commenced operations in 1991. In the beginning they were allowed to operate in Western and Southern Zone of India respectively. However, later on, the RBI lifted these area restrictions on their operations and accordingly, both these companies were given permission to expand and operate their business in other parts of the country. In view of this, they can operate on all-India basis. In 1993 the RBI allowed all the scheduled commercial banks to introduce factoring services either departmentally or through a subsidiary set-up. Besides SBI Factors and Commercial Services and Canbank Factors Ltd., there are a few non-banking finance companies such as Formost Factors Ltd., Global Trade Finance Pvt. Ltd. (a subsidiary of EXIM Bank) and Integrated Financial Services Ltd., which are also in the business of domestic factoring in India. Of these, Global Trade Finance Pvt. Ltd. and Formost Factors Ltd. have undertaken the business of export factoring also. Besides these non-banking finance companies, Small Industries Development Bank of India (SIDBI), Hongkong and Shanghai Banking Corporation have been offering factoring services to their clients. Almost all of them have been providing factoring services to the SSI and non-SSI units.

Factoring companies in India Canbank Factors Limited: http://www.canbankfactors.com SBI Factors and Commercial Services Pvt. Ltd: http://www.sbifactors.com The Hongkong and Shanghai Banking Corporation Ltd: http://www.hsbc.co.in/1/2/corporate/trade-and-factoring-services Foremost Factors Limited: http://www.foremostfactors.net Global Trade Finance Limited: http://www.gtfindia.com Export Credit Guarantee Corporation of India Ltd: https://www.ecgc.in/Portal/productnservices/maturity/mfactoring.asp

Citibank NA, India: http://www.citibank.co.in Small Industries Development Bank of India (SIDBI): http://www.sidbi.in/fac.asp Standard Chartered Bank: www.standardchartered.co.in

International Factoring In international factoring there are usually two factors. The export factor looks at financing the exporter and sales administration (presenting invoices at the right time, collecting payments being the key tasks). The import factor is interested in evaluating the buyer, collecting the money on time at the same time ensuring that he is protected against default. International factoring encompasses all the four services, that is, pre-payments, sales ledger administration, credit protection and collections.

Step Guide to International Factoring: 1. The importer places the order for purchase of goods with the exporter. 2. The exporter requests the Export Factor for limit approval on the importer. Export Factor in 3. Turn forwards this request to an Import Factor in the Importer's country. The Import Factor 4. Evaluates the Importer and conveys its approval to the Export Factor who in turn conveys 5. Commencement of the Factoring arrangement to the Exporter. 6. The exporter delivers the goods to the importer. 7. Exporter produces the documents to the Export Factor. 8. The Export Factor disburses funds to the Exporter upto the prepayment amount decided and at the 9. Same time the forwards the documents to the Import factor and the Importer.

10. On the due date of the invoice, the Importer pays the Import Factor, who in turn remits this 11. Payment to the Export Factor. 12. The Export Factor applies the received funds to the outstanding amount of the advance against 13. The invoice. The exporter receives the balance payment. In the international product suite, apart from the existing export-factoring product, we are now poised to launch import factoring as well. That will make us the first and only Bank offering the entire bouquet of factoring products to customers in India.