Factoring & Forfaiting
Factoring
Concept
Mechanism
Functions of a factor
• Administration of sales ledger
• Provision of collection facility
• Financing trade debts
• Credit control and credit protection
• Advisory services
Cost of services
• Finance charge
• Service fee
Types of factoring
• Recourse and non-recourse factoring
• Advance and maturity factoring
• Full factoring
• Disclosed and undisclosed factoring
• Domestic and export factoring
• Invoice discount
Factoring v/s. Bill Discounting
Similarities
• Short term finance
• Discounting accounts receivable
Differences
• Recourse
• Responsibility
• Services
• Rediscounting
• Provision of bulk finance
• Stamp duty
• Documents
• Working capital limits
Factoring v/s. Cash Credit
Similarities
• Short term finance
Differences
• Margin
• Drawing power
• Submission of statements
• Collection services
• Working capital limits
Advantages of factoring
To client (Seller)
• Impact on balance Sheet
• Higher credit standing
• More time for planning
• Reduction of cost and expenses
• Additional source
• Improves cash flows
• Results in higher level of sales activity
• Support services helps the client to concentrate more on the production and marketing activity resulting in cost reduction
To the customer
• Facilitates credit purchases
• Provides adequate credit period for making payments
• Periodical statements helps manage Accounts Payable
To the factor
• Additional source of income
• Improves quality of advances
Forfaiting
Forfaiting v/s. Export Factoring
1. Discounting
2. Financing
Players in Indian Market
Success of SBI Factors lies in:
1. Good logistic support from SBI
2. Margin requirements
3. Monthly statements
4. Grace period and overdue interest
5. No need for collateral security
Success Stories of SBI Factors, Coimbatore
1. Suja Rubber Industries Ltd., SSI unit of Pondicherry
2. Annapoorani Electricals, an SSI unit of Coimbatore
Canbank Factors- Success in easy and quick processing
Global Trade Finance Pvt. Ltd. (GTF)
Reasons for slow growth of factoring industry in India
1. Factoring is not a Standalone Product
2. Non-Recourse Factoring is almost missing
3. Commercial Banks are resistant to render factoring services
4. Customers are still not aware of factoring services
5. Bankers do not permit their customers to shift their business to factors
6. Network of branches is poor for factoring companies
7. Factoring companies are treated as NBFCs
8. Factors are not permitted to make pre-shipment finance in case of exports
9. Legal environment is not very conducive
SMEs
Progress:
Unibios Laboratories, a Mumbai-based pharmaceatical company, a 40-crore SME, had been funded by banks on the basis of collateral for short term working capital.
As per Factors Chain International (FCI). A Netherlands-based association of factoring companies has in 5 years grown from Rs. 1,980 crore ($450 million) in 2002-03 to Rs. 11,000 crore ($2.5 billion) today. This number is expected up to 44.000 crore ($10 billion) by end-2007.
300 thousand companies in 60 countries currently use factoring as a means of credit, amounting to a global business of over Rs. 52,20,000 crore (900 billion pounds). Asia-Pacific Region accounts for 16% of this value.
SMEs are responsible for 34 per cent of India’s exports.
Hurdles:
Use of LCs
Payment of accumulated debts
Penal interest rate
Domestic factoring expensive
Levy of fees
Favorable Factors:
Export Factoring cheaper
Bundle of services offered
Factoring
Concept
Mechanism
Functions of a factor
• Administration of sales ledger
• Provision of collection facility
• Financing trade debts
• Credit control and credit protection
• Advisory services
Cost of services
• Finance charge
• Service fee
Types of factoring
• Recourse and non-recourse factoring
• Advance and maturity factoring
• Full factoring
• Disclosed and undisclosed factoring
• Domestic and export factoring
• Invoice discount
Factoring v/s. Bill Discounting
Similarities
• Short term finance
• Discounting accounts receivable
Differences
• Recourse
• Responsibility
• Services
• Rediscounting
• Provision of bulk finance
• Stamp duty
• Documents
• Working capital limits
Factoring v/s. Cash Credit
Similarities
• Short term finance
Differences
• Margin
• Drawing power
• Submission of statements
• Collection services
• Working capital limits
Advantages of factoring
To client (Seller)
• Impact on balance Sheet
• Higher credit standing
• More time for planning
• Reduction of cost and expenses
• Additional source
• Improves cash flows
• Results in higher level of sales activity
• Support services helps the client to concentrate more on the production and marketing activity resulting in cost reduction
To the customer
• Facilitates credit purchases
• Provides adequate credit period for making payments
• Periodical statements helps manage Accounts Payable
To the factor
• Additional source of income
• Improves quality of advances
Forfaiting
Forfaiting v/s. Export Factoring
1. Discounting
2. Financing
Players in Indian Market
Success of SBI Factors lies in:
1. Good logistic support from SBI
2. Margin requirements
3. Monthly statements
4. Grace period and overdue interest
5. No need for collateral security
Success Stories of SBI Factors, Coimbatore
1. Suja Rubber Industries Ltd., SSI unit of Pondicherry
2. Annapoorani Electricals, an SSI unit of Coimbatore
Canbank Factors- Success in easy and quick processing
Global Trade Finance Pvt. Ltd. (GTF)
Reasons for slow growth of factoring industry in India
1. Factoring is not a Standalone Product
2. Non-Recourse Factoring is almost missing
3. Commercial Banks are resistant to render factoring services
4. Customers are still not aware of factoring services
5. Bankers do not permit their customers to shift their business to factors
6. Network of branches is poor for factoring companies
7. Factoring companies are treated as NBFCs
8. Factors are not permitted to make pre-shipment finance in case of exports
9. Legal environment is not very conducive
SMEs
Progress:
Unibios Laboratories, a Mumbai-based pharmaceatical company, a 40-crore SME, had been funded by banks on the basis of collateral for short term working capital.
As per Factors Chain International (FCI). A Netherlands-based association of factoring companies has in 5 years grown from Rs. 1,980 crore ($450 million) in 2002-03 to Rs. 11,000 crore ($2.5 billion) today. This number is expected up to 44.000 crore ($10 billion) by end-2007.
300 thousand companies in 60 countries currently use factoring as a means of credit, amounting to a global business of over Rs. 52,20,000 crore (900 billion pounds). Asia-Pacific Region accounts for 16% of this value.
SMEs are responsible for 34 per cent of India’s exports.
Hurdles:
Use of LCs
Payment of accumulated debts
Penal interest rate
Domestic factoring expensive
Levy of fees
Favorable Factors:
Export Factoring cheaper
Bundle of services offered