Assignment work

on
Financial institution and
services

Factoring services in India

Submitted By:
Akash
Rgd no.10800583
 Factoring in
India
What is factoring?

Factoring is a financial option for the management of receivables. In simple definition it is the
conversion of credit sales into cash. In factoring, a financial institution (factor) buys the
accounts receivable of a company (Client) and pays up to 80%(rarely up to 90%) of the
amount immediately on agreement. Factoring company pays the remaining amount (Balance
20%-finance cost-operating cost) to the client when the customer pays the debt. Collection of
debt from the customer is done either by the factor or the client depending upon the type of
factoring. We will see different types of factoring in this article. The account receivable in
factoring can either be for a product or service. Examples are factoring against goods
purchased, factoring for construction services (usually for government contracts where the
government body is capable of paying back the debt in the stipulated period of factoring.
Contractors submit invoices to get cash instantly), factoring against medical insurance etc.
Let us see how factoring is done against an invoice of goods purchased.

credit sale of
goods
Customer Client
Invoic
e

Pays the
balance
Pays the amount (In
amount
recourse type customer Submit
pays through client) invoice copy
Payment up
to 80%
initially

Factor

Characteristics of factoring

1. Usually the period for factoring is 90 to 150 days. Some factoring companies allow
even more than 150 days.
2. Factoring is considered to be a costly source of finance compared to other sources of
short term borrowings.
 3. Factoring receivables is an ideal financial solution for new and emerging firms
without strong financials. This is because credit worthiness is evaluated based on the
financial strength of the customer (debtor). Hence these companies can leverage on
the financial strength of their customers.
4. Bad debts will not be considered for factoring.
5. Credit rating is not mandatory. But the factoring companies usually carry out credit
risk analysis before entering into the agreement.
6. Factoring is a method of off balance sheet financing.
7. Cost of factoring=finance cost + operating cost. Factoring cost vary according to the
transaction size, financial strength of the customer etc. The cost of factoring vary from
1.5% to 3% per month depending upon the financial strength of the client's customer.
8. Indian firms offer factoring for invoices as low as 1000Rs
9. For delayed payments beyond the approved credit period, penal charge of around 1-
2% per month over and above the normal cost is charged (it varies like 1% for the first
month and 2% afterwards).

Different types of Factoring

1. Disclosed and Undisclosed

2. Recourse and Non recourse

A single factoring company may not offer all these services.

Disclosed

In disclosed factoring client's customers are notified of the factoring agreement. Disclosed
type can either be recourse or non recourse.

Undisclosed

In undisclosed factoring, client's customers are not notified of the factoring arrangement.
Sales ledger administration and collection of debts are undertaken by the client himself.
Client has to pay the amount to the factor irrespective of whether customer has paid or not.
But in disclosed type factor may or may not be responsible for the collection of debts
depending on whether it is recourse or non recourse.

Recourse factoring

In recourse factoring, client undertakes to collect the debts from the customer. If the customer
don't pay the amount on maturity, factor will recover the amount from the client. This is the
most common type of factoring. Recourse factoring is offered at a lower interest rate since the
risk by the factor is low. Balance amount is paid to client when the customer pays the factor.

Non recourse factoring

In non recourse factoring, factor undertakes to collect the debts from the customer. Balance
amount is paid to client at the end of the credit period or when the customer pays the factor
whichever comes first. The advantage of non recourse factoring is that continuous factoring
will eliminate the need for credit and collection departments in the organization.
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

HSBC provides finance solutions for all your sales and purchase requirements on the
domestic front, and various export-factoring product services on the international level.

Our factoring services offer a comprehensive receivables and payables management solution
which includes transaction financing, credit protection, sales ledger administration and
payment collection.

At HSBC, our ability to be the comprehensive provider of Trade Solutions makes us a leading
player in the Trade & Factoring market in India.

We have dedicated Relationship Managers to provide any assistance that you may require
with respect to your business and your trade needs.

SBI Global Factors Limited (SBIGFL) is the only provider of international factoring,
domestic factoring and forfaiting services under one roof in India. SBIGFL has established
itself as a market leader in international factoring providing value added services to its
clients.

SBIGFL is headquartered in Mumbai with six regional offices - one each in New Delhi,
Bangalore, Chennai, Hyderabad, Ahmedabad and Kolkata. SBIGFL aims to be the premier
export and import solution provider in India offering professional quality services on an e-
commerce platform.
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.

Benefits of Factoring?

Maximizes the cash available to you

Factoring provides more cash than traditional bank lines of credit.

 No arbitrary line of credit amount

You borrow based on your sales activity so you are automatically set up to finance your
growth.

 Cash Flow is more predictable

In addition to speeding up your cash flow, factoring also makes it easier to manage your cash
since your invoicing is more predictable than when customer payments will be received.

 Flexibility with your financing

Factor when you want, as much as you want, and for as long as you want. With 21st, there is
no minimum factoring level or commitment to factor in the future.

 Improved credit evaluation

21st can provide credit reports and expertise in helping to assess new customers or changes to
existing ones.

Future Aspects of Factoring Services provided by tha different-2 company

Factoring services make available the much neeeded working capital to Small Scale
Enterprises and is likely to induce customers to make timely payments for fear of adverse
"customer-image" in the market.

Factoring services are being increasingly set up, which is a good sign. Some private factoring
companies have also come up.
Factoring is of great help to small exporters, manufacturers and service providers. Factoring
also involves checking the creditworthiness of buyers, assuming credit risk, protection against
write-offs, collection and management of receivables and immediate cash advances against
receivables.

Factoring offers freedom from bad debt and provides cash to finance future growth. But this
form of financing is yet to become popular with business and industry in India after its
introduction more than 15 years ago.

According to HSBC, India has climbed to the third position in the group’s total factoring
business below the UK and Hong Kong.