Bill Financing

According to the Indian Negotiable Instruments Act 1881,

Bill of Exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of that instrument.

Promissory note
A negotiable promissory note is unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand to the payee, or at fixed or determinable future time, sum certain in money, to order or to bearer. Bank note is frequently referred to as a promissory note, a promissory note made by a bank and payable to bearer on demand.

Bank notes

Terms & concepts

Drawer. Drawee. Acceptance. Payee. Endorsement.

Types of Bills
Demand Bills. Usance Bills. Documentary Bills. Clean Bills. Inland Bills. Foreign Bills. Accommodation Bills. Supply Bills.

BILL FINANCING
A method of financing of trade activities through bills of exchange is known as bill financing. It is also bill discounting. When the seller (drawer) deposits genuine commercial bills and obtains financial accommodation from a bank or financial institution, it is known as bill discounting. The seller, instead of discounting the bill immediately, may choose to wait till the date of maturity. Bills financing involves parties such as the drawer (seller), the drawer (buyer) and the financier (banker).

Mechanics of BILL FINANCING

Precautions by Banker
Credit standing & credit appraisal Complete bills Genuine trade bills Proper documentation Place of transaction Goods

Factoring
Factoring originated in countries like USA, U.K, France, etc where specialized financial institutions were established to assist firms in meeting their working capital requirements by purchasing their receivables. 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 exchange for immediate money with which to finance continued business.

 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 exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firms credit worthiness. Secondly, factoring is not a loan it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.

Factoring & Forfaiting

It is different from the forfaiting in the sense that forfaiting is a transaction based operation while factoring is a firm-based operation meaning, in factoring, a firm sells all its receivables while in forfaiting, the firm sells one of its transactions.

MECHANISM
Under the factoring arrangement, the seller does not maintain a credit or collection department. The job, instead is handed over to a specialized agency, called the Factor. After each sale, a copy of the invoice and delivery challan, the agreement and other related papers are handed over to the Factor .

 The Factor, in turn receives payment from the buyer on the due date as agreed, whereby the buyer is reminded of the due date payment account for collection. The Factor remits the money collected to the seller after deducting and adjusting its own service charges at the agreed rate. Thereafter, the seller closes all transactions with the Factor.

FACTORING AND OFF-BALANCE SHEET FINANCING

Under factoring arrangements, and while making credit sales, the invoice is made in the name of the Factor. The receivables become the assets of the Factor. The clients debts are purchased by the Factor. Hence, the finance provided by the Factor goes off the balance sheet, and the items appear in the balance sheet only as a contingent liability in the case of recourse factoring. In case of non-recourse factoring it does not appear in the financial statement of the borrower

Types of factoring
Domestic Disclosed Discount Export

FUNCTIONS OF A FACTOR
Maintenance/administration of sales ledger Collection facility/of accounts receivable Financing facility trade debts Assumption of credit risk/credit control and credit protection Provision of advisory services