Discounting, Factoring and Forfeiting

7/29/2019 Discounting, Factoring and Forfeiting

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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

Date post:	14-Apr-2018
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