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Factoring & Forfeiting

Factoring
Meaning Method Types Charges Legal

Aspects

Meaning Of Factoring
Factoring is a continuing arrangement between a financial intermediary (Factor) and a business concern (Client). Where the factor purchases the clients accounts debts either with or without recourse to the client. This relation enables the factor to control the credit given to customer.

Meaning Of Factoring
In other words we can say that it is a finance service designed to improve the clients cash flow by turning his credit sales invoices into ready cash, and control on credit sales by factor itself.

Factoring
Meaning Method Types Charges Legal

Aspects

Method Of Factoring
Client Factor
1

Customer

1.Customer Places order with Client on credit and product/ service is delivered.

Method Of Factoring
2

Client

Factor

Customer

2.Client assigns invoice to factor.

Method Of Factoring
2 3

Client

Factor

Customer

3.Factors makes a prepayment upto 80% and sends periodical statements.

Method Of Factoring
2 3

Client
4

Factor

Customer

4. Monthly statement of accounts to customer and follow ups.

Method Of Factoring
2 3

Client
4 5

Factor

Customer

5. Customer makes payment to factor.

Method Of Factoring
2 3 6

Client
4 5

Factor

Customer

6. Factor makes balance 20% payment on realisation to the client.

Factoring
Meaning Method Types Charges Legal

Aspects

Types of Factoring
Recourse

Factoring Non recourse factoring Advance and Maturity Factoring Old line factoring/Full factoring Cross Border/ International Factoring Invoice Discount

Factoring
Meaning Method Types Charges Legal

Aspects

Factoring Charges
FINANCE

CHARGES are charged on prepayment made by factor in clients account. (mostly according to bank rates) FEE is minimal charge levied at monthly intervals to cover the cost of service.

SERVICE

Factoring
Meaning Method Types Charges Legal

Aspects

Legal Aspects
All

transaction attracts stamp duty for assigning factor. No duplication. All papers are given to factor The factor is assign to debts and to draw negotiable instruments.

Bill Discounting V/s. Factoring


Every

Bill is considered Different. Takes a long time for individual bill passing. More paper work Costly includes stamp duty and bank charges Requires original documents. Grace period is less. Geographical area is limited.

Cash Credit V/s Factoring


Margin

retained is 50% approx. Limit is checked once in month. More paper submitted to bank otherside factor maintains reports. If debts are increased no grace period, otherway you are marked in redlist.

Forfeiting

Meaning
Forfaiting is the discounting of international trade on a 100% without recourse basis. Forfaiting converts export credit sales in cash sale. It protects exporter from all risks in selling overseas on credit. Exporter receives money after deducting some charges, therefore it is called a long term financing to importers.

Characteristics
100

% finance without any risk of exporter. Time period 60 days to 10 Year. Normally traded in $ and euro. It is tailormade in interest and credit period and so on. Importers obligation is a local bank guarantee. Value should be high ( $100000). The exporters own bank limit is full or not available.

Exporter

Importer

Forfeiter

Bank

1. Commitement to Purchase Debt.

Exporter

Importer

Forfeiter

Bank

2. Commercial Contract

Exporter

Importer

Forfeiter

Bank

3. Delivery of goods

Exporter

Importer

Forfeiter

Bank

4. Gives Guarantee

Exporter

2 3 5

Importer

Forfeiter

Bank

5. Hands over documents

Exporter

2 3 5

Importer

Forfeiter

Bank

6. Delivers Documents

Exporter

2 3 5

Importer

Forfeiter

Bank

7. Makes payment

Exporter

2 3 5

Importer

Forfeiter

Bank

8. Presents documents for payment

Exporter

2 3 5

Importer

Forfeiter

Bank

9. Repays at maturity

Exporter

2 3 5

Importer

Forfeiter
10

Bank

10. Payments to forfaiter.

Charges
DISCOUNT

RATE is the rate at which the face value of a negotiable instrument is discounted . Normally over London Inter-Bank offer rate. A high country risk and longer credit period will attract higher rate. COMMITEMENT FEE is calculated on time period. HANDLING FEE is applicable for documentation and custom clarification.

Factoring V/s. Forfeiting


For

Short Period Can be recourse Upto 80 % Two cost charges Sales ledger is managed Bank is not involved

For long term Only non recourse 100% Three cost charges Nothing is managed Bank is always included

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