Bill Discounting

Factoring &
Forfaiting
BILL DISCOUNTING
While discounting a bill, the Bank buys the
bill (i.e. Bill of Exchange or Promissory Note)
before it is due and credits the value of the
bill after a discount charge to the customer's
account. The transaction is practically an
advance against the security of the bill and
the discount represents the interest on the
advance from the date of purchase of the bill
until it is due for payment.
CONDITIONS

A bill must be a usance bill.

It must have been accepted and bears at
least two good signatures (e.g. of reputable
individuals, companies or banks etc.)
The Bank will normally only discount trade
bills.
Where a usance bill is drawn at a fixed
period after sight the bill must be accepted to
establish the maturity.
CONDITIONS

The discount should be based on real trade

background.
The discount tenor starts from the date of
discount and expires at the maturity of the
bill.
DIFFERENT TYPES OF BILLS
DISCOUNTING

Sales bill discounting (Drawer bill

discounting)
Supplier bill discounting (Drawee bill
discounting)
LC Bill discounting
What is factoring?
Factoring is an ongoing arrangement between the
client and the factor, where the sales of goods and
services are made on open account terms and the
invoices for the same are assigned to the factor
regularly for the purpose of funding, collection and
sales ledger administration.
Factoring involves a long-term relationship between
the buyer and the seller with the whole turnover
being assigned to the factoring company.
Origin

Came into existance in the year 1920

It was not an organised sector that time
Association of British Factors(ABF) came in 1976
Nearly 90% of global factoring turnover comes from
USA & Europian countries
RBI appointed the C.S.Kalyanasundaram Committee
(1988)
It suggested to start factoring by a bank through its
subsidiary
As of today,

Worldwide, factoring volume is more than

USD 700 billion a year
Spread over nearly 60 countries and
covering more than 1,00,000 businesses.
Particularly in developed countries, factoring
is an accepted way of conducting business.
Why use Factoring?

Through the use of Factoring receivables are

instantly converted into cash leading to improved
cash flows that can help funding of future growth.
It facilitate an efficient follow up of payments from
buyers, which is made possible through
relationships developed by factors with clients
buyers.
Factoring provides credit protection for export
sales which enables to do business with buyers
who are unwilling to open Letters of Credit.
Factoring also provides other peripheral services
such as advisory services, credit assessment, etc.
What are the types of factoring
arrangement?

There are basically two types of Factoring

arrangements:
1) Domestic Factoring- If you are selling in
India.
2) International Export Factoring- If you are
exporting form India.
Domestic Factoring

The factoring arrangement where all the

three- the factor, the seller and the buyer are
in the same country, subject to the same
laws.
International Factoring

The factoring arrangement, where the seller

and the buyer are in two different countries
involving co-operation between two factoring
companies, one in the sellers country
(Export Factor) and the other in the buyers
country (Import Factor)
Major Types of Factoring

Non-Recourse Factoring - It is the most

comprehensive type of factoring arrangement
offering all types of services namely:
Finance
Sales Ledger Administration
Collection
Debt Protection
Advisory Services
It gives protection against bad debts to the client.
In other words, in case the customer fails to pay,
the factor will have no recourse to the client and
will have to absorb the bad debts himself.
Recourse Factoring

In this type of factoring arrangement, the

factor provides all types of facilities except
debt protection. In other words, the client is
responsible for any bad debts incurred.
Invoice Discounting

In this type of factoring arrangement, only

finance is provided and no other service is
offered.
Undisclosed Factoring Or Open
Account Receivables

The factor does not follow up or collect

payment from the customer. The customer
may not be aware of the factoring
arrangement and pays the client directly. The
factor receives payment of invoices through
the client.
Factoring Charges

Finance Charge - It represents the interest

on funds made available to the client by way
of prepayment against purchase of approved
invoices.
Service Charge - The charge levied for
rendering non-funding services such as
collection, sales ledger maintenance and
other advisory services.
How much advance can Client get?

Advances are made as a percentage of

invoice value based on criteria, such as,
quality of receivables, number and quality of
the buyers and clients requirements.
Typically 80 % of invoice value is advanced.
Advantages (to the client)
Immediate conversion of cash sale
Competitive credit terms
Accelerate the production cycle
Free from tensions
Efficient W.Cap. Management
Assessing quality of debtors
Expansion of business
Advantages

To the Buyers
Adequate credit facilities
Getting periodical statement from the factor
No affect on quality of goods, contractual
obligations etc.
Benefits of International Factoring

To the Exporter
Deals with only one factor
He gets specialised knoweledge
Risk of B/D are reduced
To the Importer
Pays the invoice in the same country
Gets better credit terms
Factoring is not suitable under following
cases -

a) where large volume of cash sales take place.

b) engaged in speculative business.
c) selling highly specialized capital equipments or
made-to-order goods.
d) where credit period offered to the buyers is
more than 180 days.
e) where there is Consignment Sale or 'Sale or
Return Arrangements'.
f) where sales are to the sister / associated
companies .
g) where sales are to the public at large, etc.
FCI (Factors Chain International)

FCI is a global network of leading factoring countries

It helps its members achieving competitive advantage
through:
A global network
Modern & effective communication system
Reliable legal framework
Standard procedures
Universal quality
World wide promotion
Training programmes
Factoring Profile(India)

Number of factoring companies 08

From Domestic factoring turnover 1450
(million euros)
From International factoring turnover - 175
(million euros)
From Total factoring turnover - 1625 (million
euros)
Large number of industries

Covered under factoring, including

automobiles, pharmaceuticals, textile,
garment and engineering.
In addition to the manufacturing sector, the
services sector industries, such as, traveling,
telecommunications, software services and
so on are also suitable for factoring.
FCI Members

Can Bank Factors Ltd. - Bangalore www.canbankfactors.com

City Bank Mumbai
ECGC of India Ltd.- Mumbai
Foremost Factors Ltd.- New Delhi www.foremostfactors.net
Global Trade Finance Ltd.- Mumbai www.gtfindia.com
SBI Factors & Commercial Services Pvt.Ltd Mumbai
www.sbifactors.com
The HSBC Ltd. - Mumbai www.hsbc.co.in
Bill Discounting Vs Factoring

Individually Acceptance One time acceptance

Short term duration Long term
High cost Low cost
More paper work Less paper work
3 days grace period Higher grace period
Requirement of original Copies -o.k.
documents Off B/s is possible
Off B/s can not be Both domestic &
Domestic International
No assignment of debt Assignment of debt
Forfaiting

Forfaiting, or Medium-Term Capital Goods

Financing, means selling a bill of exchange, at a
discount, to a third party, the Forfaiter, who collects
the payment from an, essentially, overseas
customer, through a collateral bank(s), and, thus,
assuming the underlying responsibility of exporters
and simultaneously providing trade finance for
importers by converting a short-term loan to a
medium term one.
Forfaiting

Done on a non - recourse basis

Used for international trade transactions, usually for
transactions not less than $100,000
Tenor of instrument ranges from 180 days to 10 years
payments are made quarterly, semi-annually, annually, or
on a bullet basis
Not so Popular as People
are suspicious of its simplicity
coupled with a lack of complex documentation
Information the Forfaiter needs
who the buyer is and his nationality;
what goods are being sold;
details regarding the value and currency of the contract;
the date and duration of the contract,including the credit
period and number and timing of payments (including any
interest rate already agreed with the buyer)
evidence of debt that will be used (either promissory notes,
bills of exchange, letters of credit)
the identity of the guarantor of payment (or avalor).
Documents required
by Forfaiter from exporter

Copy of supply contract, or of its payment terms

Copy of signed commercial invoice
Copy of shipping documents including certificates of
receipt, railway bill, airway will, bill of lading or
equivalent documents
Letter of assignment and notification to the guarantor
Letter of guarantee, or aval (standby letters of credit
may also be used)
Forfaiting Charges

Forfaiters try to ensure that the buyer, not the seller,

incurs charges involved in a Forfait transaction.
Charges depend on
the level of interest rates relevant to the currency of
the underlying contract at the time of the Forfaiter's
commitment
the Forfaiter's assessment of the credit risks related
to the importing country and to the avalizing (or
guaranteeing) bank
Forfaiting vs Export Factoring
Similarities

Doneon Non recourse basis

Common features for advance payment
 Differences
Forfaiting
The entire value of bill is
discounted by forfaiter
Involvement of Availing Bank
Purely a financing arrangement
Long term
Exchange rate fluctuations are
guarded against
Export Factoring
Discounted value ranges
between 75 85 %
Export factor assesses credit
worthiness
Also includes ledger
administration, collection, etc
Short term
Exchange rate fluctuations not
guarded against