Post on 14-Apr-2018
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Discounting, factoring and forfeiting
fsm
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Bill discounting
It should be a usance bill 30-180 days
2 signatures
With recourse-
Or Without recourse-
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With recourse
Documentary cr- undertaking by the bank to pay tothe seller on request of the buyer
Bk checks this dc and sends this to bank requestingfor payment to the customer
Nominated bk need not check the documents Here nominated bank will claim the fund
The nominated bk will send the amount to the bankand pay to the customer
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Without recourse
Bker passes the original dc and uncheckeddocuments to the nominated bk on a collectionbasis, requesting payment
Nominated bnk has to check documents in normal
way Opening bank present documents to nominated
bank without recourse
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Factoring
Continuing arrangement Between financial institution and the business concern
Selling goods and services to trade customers
Whereby the factor purchases the clients a/c receivableswith or without recourse to the client
Control the cr to the customers and administers thesales ledger
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Modus Operandi
Factor operates by buying from the selling company theirinvoiced debts.
Purchased without recourse
Cr controller, collection and sales accounting work Mgmt of the co concentrate on production and sales
Need not look out on this matter
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They obtain money-80% of invoice Without having to wait till the buyer pays
Factor charges service charges
Seller of good and services make arrangement of
the factor
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Invoice
Notify the factor-copy is sent
Funding-80% amt
Follow up with the customer
Payment received by factor from customer
Balance payment made immediately once amt is
received He sends monthly stmt
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Parties
Buyer of goods Seller of goods
factor
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Characteristics
Factoring is a money mkt instrument book debts
Not a negotiable instrument- customers consent isreqd
service charges Credit insurance facility available to the client
Margin 5-20%
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functions
Instant cash Follow up & Speedy collection
Sales ledger administration
Credit protection
Advisory services
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Benefits of factoring
To the seller:Liquidity
Ledger mgmt
Add on benefits
Statements
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To the customer of seller
Adequate cr period No documentation
Co can strengthen its links
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disadvantage
Image- factor is not a good sign Not suitable for one time sales
Higher cost
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Terms and condition
Basic offer statement Acceptance
Non recourse condition
Power of attorney
Agreement to dosclose factoring
Non collection of dues by the firm
Cr to customers- commission , warranties etc
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Types of factoring
Non- recourse factoring- offers all types of serviceswith debt protection
Finance, sales ledger, debt, protection, advisory
Recourse factoring-all types of facilities accept fordebt protection
Invoice factoring- only finance no other service
Maturing factoring- no finance other services are
provided
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Undisclosed- does not collect paymt from customer.Customer doesnot know abt factoring arrangementand makes paymt to client. client pays to factor
Domestic-ask students
International factoring- ask students
Guarantee based factoring-due date importer pays toexporter for the invoice for which factor gives
guarantee
With With t
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With recourse Without recourse
concept If client doesnt pay
factor recovers itfrom seller
It becomes bad debt
risk Shared by client andfactor
Factor
cost Less expensive feeof the factor
Very expensive
use Commonly used Less common
exampele Mftg business Transportation
industry
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exclusions
No financing by the bank
Professional fees are not factorable- advancepaymt,part paymt cannot be controlled
Sale of capital goods
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Factoring in India
Hampered because of regulations No law or legislation
No protection to factors under debt recover tribunal.
Indias factoring business 9950 cr in 2005
Citibank
Export cr guarantee corporation of India ltd
Sbi
Honkong shanghai bkin corp ltd
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Benefits of international factoring
Competitive terms of sale Protection against cr losses on foreign customers
Lower cost on transactions
Liquidity
Borrowing increases more
Eases cr burden
Pay commission rest is looked by factor
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exporter
Exporters
factor
importer
Importers
factor
Signs afactoringcontract.
Givesrecievabl
e toexportfactor
Heselectimport
factor ofthe
importers country
He is giveninvoice and
told to check
cr worthinessof importer
It will help importer to place on order by not issuing L/C
Once goods aredispathched xporte is
paid 80% amount.
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Factors chain international
Facilitate international trade thru factoring andrelated financial services
It helps its members to get international tradefinancial services thru globall network of first class
factoring companies 1968
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Forfeiting
Exporter relinguishing his right For getting immediate payment
Because he is paid after sme time
Selling a bills of xchange- at disount- to a third party-
who collects payment from-importer-thru a bank-simultaneously provide- mediium term loan toimporters
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Here forfeitor will either claim the money fromimporter or he will sell the same invoice to anotherinvestor on a nonrecourse terms
Matching with bill discounting concept
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features
International trade transactions Not less than 100000 $ transactions handled
Fixed rate medium term finance
Some FS takes invoice for 10 yrs and shorter period
is 180 days Payment made semiannually basis
Risk element eliminated
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Benefits
Fixed rate finance No recourse
Liquidity
Debt admin
Currency and int rate risk
Forfeiting cost can be charged to the importer
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drawbacks
Carefull documentation for availing non recourse
Importers guarantor
Higher cost
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Information needed by forfeitor
Buyer and his nationality
Details of goos or projects
Detail of Value and currency of contract
Date and duration
Installment or not
Evidence of debt that will be used
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Documents required by a forfeitor
Copy of supply contract
Copy of signed invoice
shipping documents
Letter of guarantee
Letter of assignment
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Cost of forfeiting
Interest
Charge of covering country risk
Foreign xchange risk
Additional cost
If necessary libor rate
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In India
Rbi approved in 92
Exim bank and authorised dealers permitted in theyear 97
To act as an intermediator between exporter and
forfeiting agency Terms and condition
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Conditions by RBI
Min amt not less than 100000$
Low cr period 180 days
Cost related issues- negotiations
Exports to ltd countries
50% got to 10 countries and 70% 15 countries