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8/2/2019 Bills of Exc
http://slidepdf.com/reader/full/bills-of-exc 1/21
Bill Financing
8/2/2019 Bills of Exc
http://slidepdf.com/reader/full/bills-of-exc 2/21
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”.
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Promissory note
• A negotiable promissory note is unconditionalpromise in writing made by one person toanother, signed by the maker, engaging to pay
on demand to the payee, or at fixed ordeterminable future time, sum certain inmoney, to order or to bearer.
• Bank note is frequently referred to as apromissory note, a promissory note made by abank and payable to bearer on demand.
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Bank notes
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Types of Bills
• Demand Bills.
• Usance Bills.
• Documentary Bills.
• Clean Bills.
• Inland Bills.
• Foreign Bills.
• Accommodation Bills.
• Supply Bills.
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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), thedrawer (buyer) and the financier (banker).
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Mechanics of BILL FINANCING
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Precautions by Banker
• Credit standing & credit appraisal
• Complete bills
•
Genuine trade bills• Proper documentation
• Place of transaction
• Goods
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Factoring
• Factoring originated in countries like USA, U.K,France, etc where specialized financialinstitutions were established to assist firms in
meeting their working capital requirements bypurchasing their receivables.
• Factoring is a financial transaction whereby abusiness sells its accounts receivable
(i.e., invoices) to a third party (called a factor) ata discount in exchange for immediate money withwhich to finance continued business.
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• Factoring is a financial transaction whereby a business sellsits accounts receivable (i.e., invoices) to a third party (calleda factor) at a discount in exchange for immediate moneywith which to finance continued business.
• Factoring differs from a bank loan in three main ways.
• First, the emphasis is on the value of thereceivables (essentially a financial asset), not thefirm’s 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.
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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 itsreceivables while in forfaiting, the firm sells
one of its transactions.
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MECHANISM
• Under the factoring arrangement, the sellerdoes not maintain a credit or collectiondepartment. The job, instead is handed over
to a specialized agency, called the ‘Factor.’After each sale, a copy of the invoice anddelivery challan, the agreement and otherrelated papers are handed over to the Factor .
•
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• The Factor, in turn receives payment from thebuyer on the due date as agreed, whereby thebuyer is reminded of the due date payment
account for collection.• The Factor remits the money collected to the
seller after deducting and adjusting its ownservice charges at the agreed rate.
• Thereafter, the seller closes all transactionswith the Factor.
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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 client’s 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 thecase of recourse factoring.
• In case of non-recourse factoring it does not appear
in the financial statement of the borrower
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Types of factoring
• Domestic
• Disclosed
•
Discount• Export
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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
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