International factoring whether it is an alternate for counter party risk management

Group 3 Abhinav Sharma Debargha Ambuly Deepak Sahu Himanshu Sharma Kalyani Mudaliar

Agenda
Introduction Factoring Explained Benefits Example Case Factoring in India FAQs

Introduction

Factoring is a financial transaction where by a business sells its accounts receivables(i.e., invoices) to a third party(called a factor) at a discount in exchange for immediate money with which to finance continued business.

INTRODUCTION
International Institute for the Unification of Private Law(Unidroit) Rome 1988 recommended in general terms factoring as under 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 1. Finance 2. Maintenance of accounts 3. Collection of debts 4. Protection against credit risk

Why a company use factoring

Factoring is used by a Firm when the available Cash Balance held by the company is insufficient to meet current obligations and accommodate its other cash needs, such as new orders or contractors.

Different Parties involved in factoring

The Buyer The Seller Factor

Parties Involved in factoring

Seller Customer Buyer

Client

Collection Buys invoices Factor

Financer

Services offered by a Factor

Follow up and collection of Receivables from clients Purchase of Receivables with or without recourse Help in getting information and credit line on customers(credit protection) Sorting out disputes, due to his relationship with Buyer & Seller

Types of Factoring
1

Full Service Recourse factoring Invoice Discounting Maturity Factoring International factoring

Benefits of International Factoring

Benefits to Exporters
Increased sales in foreign markets by offering competitive terms of sale Protection against credit losses on foreign customers Accelerated cash flow through faster collections Lower costs than the aggregate charges for L/C transactions Liquidity to boost working capital Enhanced borrowing potential and an opportunity to make use of supplier discounts

Benefits of International Factoring

Benefits to Importers
Purchase on convenient 'open account' terms No need to open L/C's Expanded purchasing power without blocking existing lines of credit Orders can be placed swiftly without incurring delays, L/C opening charges, negotiation charges, etc.

Example Case MAC Carpets, Egypt

Back ground of the Company MAC Carpets is a premium exporter in Egypt Sister concern of Oriental Weavers Group which is one of the largest private conglomerates in Egypt 90% of its production goes to 107 countries They were dealing directly with Foreign factoring companies for many years to sustain their needs in buyer markets

Example Case
Issues

MAC Carpets, Egypt

2008 financial crisis Access to finances shrinked especially in USA & Canada Risk of buyers default was increasing Decided to explore alternative financing options and protect exports

Example Case

MAC Carpets, Egypt

Association with EGYPT FACTORS Developed with FIM Bank, CIB & IFC EF introduced the benefits of dealing with members of Factors Chain International (FCI) FCI One stop solution for exports to 60 countries for risk protection, collection & finance

Any combination can be chosen by parties concerned MAC Carpets leveraged the services fully

Factoring in India
SBI Factors 1991, Currently holds 75% market share Canara Bank Foremost Factors Ltd HSBC to provide services to SMEs over 5 Crores turnover in cities like Mumbai, New Delhi, Kolkata, Pune, Bangalore, Chennai Global companies like DBS, GE, Standard Chartered willing to start operations in India Growing Market in India The Regulation of Factor (Assignment of Receivables) bill 2011 is expected to set new standards & regulations for this business in India
Removal of stamp duty for non banking Factoring companies Registration and Regulation of Factoring companies with RBI Assignment of receivable will be noted in a central registry Extend the law relating to recovery of debt to dues under a factoring arrangement.

FAQs
Q.: If I use factoring, will my customers think that my financial position is unsatisfactory? Ans.: You should not be concerned about that. Factoring has become so well established that almost certainly your customers will already be dealing with a factor, either by using one themselves or through other suppliers that they have. During 2009 the total volume of business handled by factoring companies around the world was over 1300 billion EUR. Factoring is rapidly becoming the obvious business tool for growing companies. Q.: How can I be sure that you will collect the receivables promptly? After all, the longer they are outstanding, the more interest you earn. Ans.: Factoring is a service industry and in order to survive it must offer excellent levels of service to clients. If we did not offer such levels of service, we would quickly lose our clients' business which would more than offset any small gain in interest income that we would generate through being slow to collect receivables. Secondly, we also take the risk of non payment of receivables. It is a well known fact that the longer a debt is outstanding the greater the chance there is that it will turn bad. We do not want to increase our risk in this way.

FAQs
Q.: Letters of Credit will give me all I need. Why do I need factoring?(FCI) Ans: If all of your customers and potential customers are happy to provide L/C's, then carry on as you are. You will however find that more and more customers are becoming less interested in buying from suppliers that insist on L/C terms. They do not like the idea of having to commit part of their funding to supporting purchases made in this way. There is also considerably more administration required on their part if L/C's are used. If you want to expand your sales into these markets you must be able to offer more "buyer friendly" terms and that means open account or at least D/A terms. Factoring can help you offer such terms without reducing your security or affecting your financing.

FAQs
Q.: The finance under a factoring contract would be very useful but is it more expensive? (FCI) Ans.: Factoring is a unique combination of finance and services, the costs are therefore impossible to compare with bank finance or credit insurance companies. The package not only includes the finance, which is priced very competitively with bank finance, it also includes 100% credit protection on your approved customers and a full invoice collection service. The service fee that we charge is very reasonable when you consider the cost of chasing payments in other countries, the cost of a bad debt to the business and the loss of profit that might be sustained through not being able to finance your growth.

FAQs
Q. Do you cover the risk of customer insolvency before the goods have been shipped? (FCI) Ans.: It is generally not covered. The risk coverage actually takes effect from the day the goods are shipped, the point at which an invoice can be raised. Pre-shipment risk coverage is available from some insurers but it can be quite expensive. It is only normally used by some businesses that have a long production time or where the products are highly specialised and would be difficult to resell to another customer if the original customer ceased to trade prior to the shipment of the goods.

Reference
Factor Chain International http://www.fci.nl/home/ SBI International Factoring http://www.sbiglobal.in/products/processFlow. htm

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