Description
This is a presentation explaining about Factoring.
Factoring
Presented By: Group 6 Kabir Tharani Rohit R Nitesh Jain Sonam Banka Vivek Didwania
Outline
• • • • • • • • • • • Definition Parties Involved Mechanism Functions Types Factoring v/s Bank Loan & Discounting Advantages Evaluation Process Factoring in India Company Example Case
Definition
• 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
Parties Involved
• The one who sells the receivable • The Debtor • The Factor
Mechanism
• Your company delivers the goods or services to the customer • An invoice is generated and sent to the client and the factoring company
Mechanism
• The factoring company advances you between 70% and 90% of the gross value of the invoice. This is your 1st installment • Once the factoring company receives payment from your customer, the remaining funds are advanced as your 2nd installment, less the financing fee
Functions of a Factor
• • • • • Financing facility- trade debts Maintenance/administration of sales ledger Collection facility- of accounts receivable Assumption of credit risk- credit control Provision of advisory services
Types
• Recourse – Default Risk stays with the selling company • Non- Recourse – Default risk is transferred to the factor
Factoring v/s Bills discounting
• Factoring is the sale of receivables whereas invoice discounting is borrowing where the receivable is used as collateral.
Factoring v/s Bank Loan
• Emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness • Not a loan – it is the purchase of a financial asset (the receivable) • Bank loan involves two parties whereas factoring involves three.
Advantages
• • • • • • Impact on Balance Sheet Higher Credit Standing Improved Efficiency More time for Planning & Production Reduction of Cost & Expenses Additional Source
Impact on Balance sheet
• Pre- Factoring
Current Liabilities Short Term Loan Other Current Liabilities Net Working Capital Current Assets 16 Inventory 49 Receivables 35 Other Current assets 100 30 20 50 100
Post Factoring
Current Liabilities Short Term Loan Other Current Liabilities Current Assets 0 Inventory 49 Receivables 20 4
Net Working Capital
35 Other Current assets
74
50
74
Impact on Balance Sheet
• Off Balance Sheet Financing
– Contingent Liability in case of Recourse – Does not appear in case of non-recourse
• Reduction Of Current Liabilities • Improvement Of Current ratio
Evaluation Framework
• Alternatives Available
– In house mgmt. by the firm – Factoring services
• Recourse • Non- recourse
Costs associated with in-house mgmt
• • • • • • • Cash Discount Cost of funds invested in receivables Bad debts Lost contribution on foregone sales Cost of sales ledger administration Cost of credit monitoring Collection cost
Cost associated with Factoring
• Factoring commission • Discount charge • Cost of long term funds invested in receivables
Benefits associated with recourse factoring
• Savings of
– Cash Discount – Cost of funds invested in receivables – Lost contribution on foregone sales – Cost of sales ledger administration – Cost of credit monitoring – Collection cost
Benefits associated with Non-recourse factoring
• Savings of
– Cash Discount – Cost of funds invested in receivables – Bad debts – Lost contribution on foregone sales – Cost of sales ledger administration – Cost of credit monitoring – Collection cost
Factoring In India
Number of Factoring companies Domestic Factoring Turnover (in Millions of EUR International Factoring Turnover (in Millions of EUR) Total Factoring Turnover (in Millions of EUR) 8 4750 450 5200
India Factoring Companies
• Export Credit Guarantee Corporation of India Ltd – Factoring Division • Global Trade Finance Limited • IFCI Factors Ltd. (Foremost Factors Limited) • SBI Factors and Commercial Services Pvt. Ltd. • Standard Chartered Bank • HSBC – Factoring and Receivables Finance
Canbank Factoring
• Subsidiary of Canara Bank • Incorporated in 1991 – SIDBI and Andhra Bank as Promoters • Factored Turnover - 2592 crores (2006-07) • Gross NPA – 5.75% • Net NPA – 1.9%
Global Trade Finance Ltd.
Types of Factoring available
• • • • Export Factoring Import Factoring Domestic Factoring Reverse Factoring
Types of companies
• Manufacturers • Transportation Companies • Distributors • Wholesalers • Staffing Firms • Telecommunication Companies • Service Providers •Advertising •Solicitors & Legal firms •Architect firms •Medical firms •Construction & Engineering Contracts •Software •Media & Entertainment
Unsuitable Cases
• Where the credit offered to customer is more than 180 days • Where there are contra sale, consignment sale, sale or return arrangements • Where most of the sales are to associated companies • Where sales are to retail consumers, to small retail outlets, or to the public at large • Where sales are to countries not covered by GTF’s overseas correspondents
Fee Structure
• Factoring discount or interest on funds utilized (11.5% currently) • Credit protection fee (0.5% currently) • Document handling fee (0.1% of invoice value currently) • A one-time limit fee payable at the time of sanction
Nagarjuna Finance - MFSL
• • • • • • • Nagarjuna Finance – NBFC Deposit Mobilisation, Hire Purchase, etc. 90,000 investors – 100 crores Hire purchase business – high defaults Nagarjuna sells to MFSL – Unable to collect Case filed against Nagarjuna RoC – Accused individually and jointly responsible
Thank You
doc_640512789.pptx
This is a presentation explaining about Factoring.
Factoring
Presented By: Group 6 Kabir Tharani Rohit R Nitesh Jain Sonam Banka Vivek Didwania
Outline
• • • • • • • • • • • Definition Parties Involved Mechanism Functions Types Factoring v/s Bank Loan & Discounting Advantages Evaluation Process Factoring in India Company Example Case
Definition
• 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
Parties Involved
• The one who sells the receivable • The Debtor • The Factor
Mechanism
• Your company delivers the goods or services to the customer • An invoice is generated and sent to the client and the factoring company
Mechanism
• The factoring company advances you between 70% and 90% of the gross value of the invoice. This is your 1st installment • Once the factoring company receives payment from your customer, the remaining funds are advanced as your 2nd installment, less the financing fee
Functions of a Factor
• • • • • Financing facility- trade debts Maintenance/administration of sales ledger Collection facility- of accounts receivable Assumption of credit risk- credit control Provision of advisory services
Types
• Recourse – Default Risk stays with the selling company • Non- Recourse – Default risk is transferred to the factor
Factoring v/s Bills discounting
• Factoring is the sale of receivables whereas invoice discounting is borrowing where the receivable is used as collateral.
Factoring v/s Bank Loan
• Emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness • Not a loan – it is the purchase of a financial asset (the receivable) • Bank loan involves two parties whereas factoring involves three.
Advantages
• • • • • • Impact on Balance Sheet Higher Credit Standing Improved Efficiency More time for Planning & Production Reduction of Cost & Expenses Additional Source
Impact on Balance sheet
• Pre- Factoring
Current Liabilities Short Term Loan Other Current Liabilities Net Working Capital Current Assets 16 Inventory 49 Receivables 35 Other Current assets 100 30 20 50 100
Post Factoring
Current Liabilities Short Term Loan Other Current Liabilities Current Assets 0 Inventory 49 Receivables 20 4
Net Working Capital
35 Other Current assets
74
50
74
Impact on Balance Sheet
• Off Balance Sheet Financing
– Contingent Liability in case of Recourse – Does not appear in case of non-recourse
• Reduction Of Current Liabilities • Improvement Of Current ratio
Evaluation Framework
• Alternatives Available
– In house mgmt. by the firm – Factoring services
• Recourse • Non- recourse
Costs associated with in-house mgmt
• • • • • • • Cash Discount Cost of funds invested in receivables Bad debts Lost contribution on foregone sales Cost of sales ledger administration Cost of credit monitoring Collection cost
Cost associated with Factoring
• Factoring commission • Discount charge • Cost of long term funds invested in receivables
Benefits associated with recourse factoring
• Savings of
– Cash Discount – Cost of funds invested in receivables – Lost contribution on foregone sales – Cost of sales ledger administration – Cost of credit monitoring – Collection cost
Benefits associated with Non-recourse factoring
• Savings of
– Cash Discount – Cost of funds invested in receivables – Bad debts – Lost contribution on foregone sales – Cost of sales ledger administration – Cost of credit monitoring – Collection cost
Factoring In India
Number of Factoring companies Domestic Factoring Turnover (in Millions of EUR International Factoring Turnover (in Millions of EUR) Total Factoring Turnover (in Millions of EUR) 8 4750 450 5200
India Factoring Companies
• Export Credit Guarantee Corporation of India Ltd – Factoring Division • Global Trade Finance Limited • IFCI Factors Ltd. (Foremost Factors Limited) • SBI Factors and Commercial Services Pvt. Ltd. • Standard Chartered Bank • HSBC – Factoring and Receivables Finance
Canbank Factoring
• Subsidiary of Canara Bank • Incorporated in 1991 – SIDBI and Andhra Bank as Promoters • Factored Turnover - 2592 crores (2006-07) • Gross NPA – 5.75% • Net NPA – 1.9%
Global Trade Finance Ltd.
Types of Factoring available
• • • • Export Factoring Import Factoring Domestic Factoring Reverse Factoring
Types of companies
• Manufacturers • Transportation Companies • Distributors • Wholesalers • Staffing Firms • Telecommunication Companies • Service Providers •Advertising •Solicitors & Legal firms •Architect firms •Medical firms •Construction & Engineering Contracts •Software •Media & Entertainment
Unsuitable Cases
• Where the credit offered to customer is more than 180 days • Where there are contra sale, consignment sale, sale or return arrangements • Where most of the sales are to associated companies • Where sales are to retail consumers, to small retail outlets, or to the public at large • Where sales are to countries not covered by GTF’s overseas correspondents
Fee Structure
• Factoring discount or interest on funds utilized (11.5% currently) • Credit protection fee (0.5% currently) • Document handling fee (0.1% of invoice value currently) • A one-time limit fee payable at the time of sanction
Nagarjuna Finance - MFSL
• • • • • • • Nagarjuna Finance – NBFC Deposit Mobilisation, Hire Purchase, etc. 90,000 investors – 100 crores Hire purchase business – high defaults Nagarjuna sells to MFSL – Unable to collect Case filed against Nagarjuna RoC – Accused individually and jointly responsible
Thank You
doc_640512789.pptx