Discounting, factoring and forfeiting

fsm

Bill discounting

It should be a usance bill 30-180 days 2 signatures With recourseOr Without recourse-

With recourse

Documentary cr- undertaking by the bank to pay to the seller on request of the buyer Bk checks this dc and sends this to bank requesting for payment to the customer Nominated bk need not check the documents Here nominated bank will claim the fund The nominated bk will send the amount to the bank and pay to the customer

Without recourse

Bker passes the original dc and unchecked documents to the nominated bk on a collection basis, requesting payment Nominated bnk has to check documents in normal way Opening bank present documents to nominated bank without recourse

Factoring

Continuing arrangement Between financial institution and the business concern Selling goods and services to trade customers Whereby the factor purchases the clients a/c receivables with or without recourse to the client Control the cr to the customers and administers the sales ledger

Modus Operandi

Factor operates by buying from the selling company their invoiced debts. Purchased without recourse Cr controller, collection and sales accounting work Mgmt of the co concentrate on production and sales Need not look out on this matter

They obtain money-80% of invoice Without having to wait till the buyer pays Factor charges service charges Seller of good and services make arrangement of the factor

Invoice Notify the factor-copy is sent Funding-80% amt Follow up with the customer Payment received by factor from customer Balance payment made immediately once amt is received He sends monthly stmt

Parties

Buyer of goods Seller of goods factor

Characteristics

Factoring is a money mkt instrument book debts Not a negotiable instrument- customers consent is reqd service charges Credit insurance facility available to the client Margin 5-20%

functions

Instant cash Follow up & Speedy collection Sales ledger administration Credit protection Advisory services

Benefits of factoring
To the seller: Liquidity Ledger mgmt Add on benefits Statements

To the customer of seller

Adequate cr period No documentation Co can strengthen its links

disadvantage

Image- factor is not a good sign Not suitable for one time sales Higher cost

Terms and condition

Basic offer statement Acceptance Non recourse condition Power of attorney Agreement to dosclose factoring Non collection of dues by the firm Cr to customers- commission , warranties etc

Types of factoring
Non- recourse factoring- offers all types of services with debt protection Finance, sales ledger, debt, protection, advisory Recourse factoring-all types of facilities accept for debt protection Invoice factoring- only finance no other service Maturing factoring- no finance other services are provided

Undisclosed- does not collect paymt from customer. Customer doesnot know abt factoring arrangement and makes paymt to client. client pays to factor

Domestic-ask students
International factoring- ask students Guarantee based factoring-due date importer pays to exporter for the invoice for which factor gives guarantee

With recourse

Without recourse

concept

risk

If client doesnt pay It becomes bad debt factor recovers it from seller Shared by client and Factor factor

cost

Less expensive fee of the factor

Commonly used

Very expensive

use

Less common

exampele

Mftg business

Transportation industry

exclusions

No financing by the bank

Professional fees are not factorable- advance paymt,part paymt cannot be controlled Sale of capital goods

Factoring in India

Hampered because of regulations No law or legislation No protection to factors under debt recover tribunal. Indias factoring business 9950 cr in 2005 Citibank Export cr guarantee corporation of India ltd Sbi Honkong shanghai bkin corp ltd

Benefits of international factoring

Competitive terms of sale Protection against cr losses on foreign customers Lower cost on transactions Liquidity Borrowing increases more Eases cr burden Pay commission rest is looked by factor

Signs a factoring contract.

Gives recievabl e to export factor

He select import factor of the importer s country

exporter Exporters factor Once goods are dispathched xporte is paid 80% amount.

He is given invoice and told to check cr worthiness of importer

importer It will help importer to place on order by not issuing L/C

Importers factor

Factors chain international

Facilitate international trade thru factoring and related financial services It helps its members to get international trade financial services thru globall network of first class factoring companies 1968

Forfeiting

Exporter relinguishing his right For getting immediate payment Because he is paid after sme time Selling a bills of xchange- at disount- to a third partywho collects payment from-importer-thru a banksimultaneously provide- mediium term loan to importers

Here forfeitor will either claim the money from importer or he will sell the same invoice to another investor on a nonrecourse terms Matching with bill discounting concept

features

International trade transactions Not less than 100000 $ transactions handled Fixed rate medium term finance Some FS takes invoice for 10 yrs and shorter period is 180 days Payment made semiannually basis Risk element eliminated

Benefits

Fixed rate finance No recourse Liquidity Debt admin Currency and int rate risk Forfeiting cost can be charged to the importer

drawbacks

Carefull documentation for availing non recourse Importers guarantor Higher cost

Information needed by forfeitor

Buyer and his nationality Details of goos or projects Detail of Value and currency of contract Date and duration Installment or not Evidence of debt that will be used

Documents required by a forfeitor

Copy of supply contract Copy of signed invoice shipping documents Letter of guarantee Letter of assignment

Cost of forfeiting

Interest Charge of covering country risk Foreign xchange risk Additional cost If necessary libor rate

In India

Rbi approved in 92 Exim bank and authorised dealers permitted in the year 97 To act as an intermediator between exporter and forfeiting agency Terms and condition

Conditions by RBI

Min amt not less than 100000$ Low cr period 180 days Cost related issues- negotiations Exports to ltd countries 50% got to 10 countries and 70% 15 countries