Factoring:Definition
Facotor is a financial intermediary,which recieved bills recievable from the companies or traders at discounted price.Factor give cash in the return of bills recievable after charging his commission.Factor advance most of the cash and remaining is paid after reciept of funds from invoice party.
Factoring is basically a financial mand management support to the client .It is a method of converting non productive and inactive assets(debts) into productive assets(cash) by selling book debts to the companies specialize in collection and administration.
For Example, If Factor purchase a incoice from X ltd.represent outstanding recievable from Y ltd, and factor is discount this invoice say rs 100000.A Factor discount it at @ 5%,then in such case factor make payment rs 95000 to the X ltd.In such case factor make payment rs 60000 in advance and remaining rs 35000 is paid after total fund rs 100000 is recieved from the Y ltd.
Functions of Factors:
1.Factor act as a local representatives for the seller of the goods.
2.Factor main function is to recieve,store and safekeeping of commodities as agents.
3.It also helps in arranging for sales and delivery of goods to buyers.
4.It helps in collecting and remitting of sales proceeds.
5.Factor hepls in making advance payments to the seller against invoice of goods.
6.Factor give fill information about the buyers to the seller before entering in the factoring.
7.Factor have special skills of analysing risk or losses related to the service of bill discounting.
8.Factor maintain the account(ledger) related to the recievables.
9.It helps in collection of recievable and protecting against default in payment by debtors.
Difference between Bills Discounting and Factoring:
1.In Bills discounting individual transaction is taking place, while Factoring is taking place between whole turnover basis.This give client liberty to draw desire finance only.
2.In Bills discounting each bills has to be individually accepted by the drawee which takes place,while in case of Factoring one time notification is taken from the customers at the commencement of the facility.
3.In Bills dicounting more paperwork is involved,whil in case of Factoing no such paperwork is involved.
4.In Bills discounting grace period of payment is 3 days,while in case of Factoring period are far more generous.
5.In Bills discounting original document like invoice,Bill of lading are to be submitted,while in case of Factoring no copies of such documents are necessary.
6.In Bills discounting Stamp duty is charged on certain usance bills together with bank charge.It prove to be very expensive,while in case of Factoring no Stamp duty is charged on invoice.No charge other than usual finance and service charge.
7.In Bills discounting charge up front charge,while in case of Factoring no up front charge is involved.Only finance charge is leived on only the amount of money withdrawn.
Difference between Cash Credit and Factoring:
1.In Cash credit margin retain is on recievables are usually 40-50%,while in case of Factoring margin retain is usually 20%.
2.In Cash credit drawing power on the basis of stock statements is computed once a month.If invoice are raise between submission of stock statements,no money can be drawn against them,while in case of Factoring prepayments against invoice are made as and when they are factored.It is like a cash sales.
3.The client has to be submitted the various statements like stock statement ect to the bank,while in case of Factoring no statements are to be given.Once the contarary factor furnish various report on both client and the customers.
4.In Cash credit no collection service performed for the customers/client,while in case of Factor have performed collection of debt.
5.In Cash credit Once the book debt exceeds it's usance period.It is removed from the eligible list,while in case of Factoring,factor allow generous grace periods.
6.In Cash credit processing fees are about 1% of the limit,while in case of Facoring maximum processing fees are about rs 30000/ for non SSI & rs15000/ for SSI.
7.In Cash credit interest link tp PLR,while in case of Factoring finance charge is linked to the cost od fund which is competitive to that of banks.
Types of Factoring:
1.Full Factoring :It is also known as without Recource factoring,providing all types of services like finance sales ledger administration,Collection,Debt protection and Customer information.
2.Recource Factoring:Under this types of Factor services client liability to Factoris not discharge until customer pay full cash pyments.It provide all types of services except debt protection.
3.Matrurity Factoring:Under this types of Factor service all types of facilities are providing except providing finance.Here payment is made to to the clients at the end of the collection period or on the day of collection amount whicheve is earlier.It is also known as Collection factoring.
4.Undisclosed Factoring:In this types of factoring arrangement between factor and client is not aware by the customer.Here, client recieve debt collections and make payments of each invoice collection to the factor, if advance payments is recieved by the client earlier.
5.Invoice Discounting:Here the facility provided by the Factor is finance.In this facilities client is from reputed company and deal it's customer directly for collection and keep this factoring arrangement confidential.Client collect payments from the customers and handed over to the Factor.Risk involved in this types of Factoring is much higher then any other methods.
6.Advance Factoring:Under this types of factoring,factor make advance payment to the client at predetermine rate of interest on non due recievable/debt collections.Afterward,at the time of Factoring client give payments to the Factor if client recieve debt collections.
7.Bulk Factoring:It is a modified version of invoice discounting whearin notification of assignment of debt is given to the customer.Client is making full payment and make collection on his own level.
8.Agency Factoring:In this types of factoring,facilities of finance and debt protection is provided by the Factor,while sales ledger administrations and collection of debts are carries out by client.
Benefits of Factoring:
1.Reduction in Administrative Overhead:The most important benefit of Factoring to the Company/Seller is to reduce administrative cost of the Business by reducing the cost of fund recovering through recovery agents,who charge extra commisions.
2.Bad debt loss reduced:Another benefit of Factoring to the seller is to reduce it's bad debts by selling it's bad debts collections to the factor.Then factor recover bad debts on his own level.
3.Better use of management time:Factoring helps seller to increase efficiences of better use of time management by avoiding wastage of time in recovering of invoice payments or bad debt recovering.
4.Increase liquidity flow:Factoring helps seller/companies to increase liquidity flow in there business because of easy availability of fund in advance through advance factoring services.
5.Increase turnover or profitability:Factoring increase liquidity among the busineses,which further increase the capacity of more production/trading and increase sales,which helps to push up the profitability of the company.
6.All round growth/diversification:Factoring ensure easy flow of funds and liquidity,which helps companies to grow and diversify there business in other sectors also.
7.Sales ledger administration:Factoring hepls busineses/sellers to maintain and keep proper record of sales ledger,sometimes factor itself administre the sales ledger.
8.Better competitive term:The Factor service provider have expertise in it's field,which helps companies/seller to increase competitiveness in there field also by reducing work load of bad debt recievable collections.
Factor benefit to the Client's Customers(Buyers):
1.Main benefit of factoring service for the buyers is that they get adequate credit period for payments of assigned debts.
2.Factor helps buyers to facilititate credit purchases,by having facilities of purchasing invoice recievable from the seller.
3.Due to the availability of Factor services,Customers saves on high Bank charges and expenses.
4.Under factor service facility,customer does not need documentation except acknowledgement of notification letter(customer undertaking to make payment of invoices to the factor).
5.Factor furnish the customers with periodic statement of outstanding invoice factor ed on them.
Factor benefit to the Client's Banker:
1.Factoring is not a threat to banking system,it is a financial service complementary to that of banks.
2.Factor improves liquidity to the client's,which hence increase liquidity to the client's bank.
3.Credit sales are closely monitored by the factor and proceeds are routed with the client's accounts with Banks.
4.Factoring improve the quality of advances of Banks.
Problems of Factoring:
1.Factoring in india is in a introductory stage only,the aspect of factoring is not so fimiliar to the industry and lack of awareness about the essential service especially among the medium scale industry is a big marketing problem.
2.The product have been design very well but the service seekers has not yet communicated,unless customer come to know they can not buy a product or service.
3.Another marketing problem of Factor is getting disclaimer certificate from bank.
4.There is lack of legal framework for the factoring services.
Benefits of Factoring:
1.Reduction in Administrative Overhead:The most important benefit of Factoring to the Company/Seller is to reduce administrative cost of the Business by reducing the cost of fund recovering through recovery agents,who charge extra commisions.
2.Bad debt loss reduced:Another benefit of Factoring to the seller is to reduce it's bad debts by selling it's bad debts collections to the factor.Then factor recover bad debts on his own level.
3.Better use of management time:Factoring helps seller to increase efficiences of better use of time management by avoiding wastage of time in recovering of invoice payments or bad debt recovering.
4.Increase liquidity flow:Factoring helps seller/companies to increase liquidity flow in there business because of easy availability of fund in advance through advance factoring services.
5.Increase turnover or profitability:Factoring increase liquidity among the busineses,which further increase the capacity of more production/trading and increase sales,which helps to push up the profitability of the company.
6.All round growth/diversification:Factoring ensure easy flow of funds and liquidity,which helps companies to grow and diversify there business in other sectors also.
7.Sales ledger administration:Factoring hepls busineses/sellers to maintain and keep proper record of sales ledger,sometimes factor itself administre the sales ledger.
8.Better competitive term:The Factor service provider have expertise in it's field,which helps companies/seller to increase competitiveness in there field also by reducing work load of bad debt recievable collections.
Factor benefit to the Client's Customers(Buyers):
1.Main benefit of factoring service for the buyers is that they get adequate credit period for payments of assigned debts.
2.Factor helps buyers to facilititate credit purchases,by having facilities of purchasing invoice recievable from the seller.
3.Due to the availability of Factor services,Customers saves on high Bank charges and expenses.
4.Under factor service facility,customer does not need documentation except acknowledgement of notification letter(customer undertaking to make payment of invoices to the factor).
5.Factor furnish the customers with periodic statement of outstanding invoice factor ed on them.
Factor benefit to the Client's Banker:
1.Factoring is not a threat to banking system,it is a financial service complementary to that of banks.
2.Factor improves liquidity to the client's,which hence increase liquidity to the client's bank.
3.Credit sales are closely monitored by the factor and proceeds are routed with the client's accounts with Banks.
4.Factoring improve the quality of advances of Banks.
Problems of Factoring:
1.Factoring in india is in a introductory stage only,the aspect of factoring is not so fimiliar to the industry and lack of awareness about the essential service especially among the medium scale industry is a big marketing problem.
2.The product have been design very well but the service seekers has not yet communicated,unless customer come to know they can not buy a product or service.
3.Another marketing problem of Factor is getting disclaimer certificate from bank.
4.There is lack of legal framework for the factoring services.
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