8/11/2019 factoring etc..docx

1/3

FACTORING

The arrangement in which short term domestic receivables on sale of goods or services are sold to a

company (known as FACTOR) is called factoring which was introduced during 1991 on the report of

Kalyanasunderama committee.

FUNCTIONS: The factor performs the functions such as

1.

Purchase of receivables

2.

Maintaining the sales or receivables ledgers

3.

Submitting sales account to the creditors

4.

Collection of debt on due dates

5.

After collection to return the reserve money to seller and provide consultancy services to the

customer.

Advantages of Factoring are:

1.

Sales practically become cash sales

2.

Money blocked with debtors becomes available for business.

3.

The seller also gets rid of collection of the receivables

4.

His working capital management becomes efficient which also reduce his cost and in turn

improve the possibility of better profits.

Process of factoring

1.

Seller sells goods to buyer on short term credit basis.

2.

Buyer accepts the bills raised by seller.

3.

Seller discounts these receivables with a FACTOR by assigning the receivables.

4.

FACTOR purchases the receivable on with or without recourse basis.

5.

FACTOR recovers the amount from buyer on due date.

With or without recourse: If non-payment loss is borne by the factor it is called without recourse

factoring.

If risk can be transferred back to seller, it is called with recourse factoring.

FORFAITING

FORFAITING represents the purchase of obligations which fall due to some future date and arise from

delivery of goods (or services)in export transactions, without recourse to the previous holder of the

obligation.

Under forfaiting, the forfeiter deducts interest in advance for the whole period of credit and disburses

8/11/2019 factoring etc..docx

2/3

the net proceeds to the exporter .The sole responsibilities of the exporter .The sole responsibilities of

the exporter is to manufacture and deliver the goods to the importer , which creates a valid payment

obligation of the importer.

FORFAITING & FACTORING: Factoring is suitable for financing smaller and short term receivables

with credit period between 90 to 180days, whereas forfaiting is used to financecapital goods exports

with credit terms between a few months to 10 years.

Factoring covers the commercial risk, whereas forfaiting additionally covers the political other risk.

Process of forfaiting:

The exporter approaches the forfaitor, willing to undertake forfaiting.

The transactions cover the export, the price of which is receivable over a medium term and it is

covered by a bank guarantee.

The forfaitor stipulates an expiry date during which the exporter will make the shipment,

prepare the documents and present the documents.

The exporter gets payment immediately on presentation of documents.

The forfaitor recovers the interest for the money, the charges for political, commercial and

country risk and other included costs.

The importer becomes liable for the cost of contract and receives the credit

from forfaitor for a given number of years, at a given interest rate.

The importers obligation is guaranteed by bank guarantee.

Security for forfaiting: The drafts (in the form of promissory notes or accepted bills of exchange)covering the transaction, are guaranteed by a bank (co-acceptance of bill of exchange or of promissory

notes by the bank) or by a bank guarantee (as a separate guarantee bond) promising to pay the amount

on the given date, in the event of non-payment by the original debtor (i.e. importer).

The guarantor is usually an internationally active bank, resident in the importers country which can

ascertain the importers creditworthiness first hand.

Repayments:The repayments are by periodical installments, usually on six month intervals. The total

-period may range up to 7-10 years.

Advantages of forfaiting:I.

100% risk cover as the forfaitor covers the (a) country risk (b) currency risk (c) commercial risk

(d) interest risk.

II.

Instant cash: the forfaitor generates instant cash for the exporter that relieves his balance sheet

and improves liquidity.

8/11/2019 factoring etc..docx

3/3

,