Factoring Servicing

8/7/2019 Factoring Servicing

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What is factor?

A company can assign its credit

management and collection tospecialist organisations called the

factor organisation or the factor.


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Factoring

Definition:

Factoring is defined as a continuing legalrelationship between a financial institution

(factor) and a business concern (client)selling goods or providing services to tradecustomers (customer) whereby, the factorpurchases the clients accounts

receivables and in relation thereto,controls the credit, extended to customersand administers the sales ledger.


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In Normal Business

CLIENT

(Supplier of

goods and/or

Services)

CUSTOMER

(Buyer of

goods and/or

Services)

Using Factoring

CLIENT

(Supplier of

goods and/or

Services)

CUSTOMER

(Buyer of

goods and/or

Services)

FACTOR


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Functions of factor

Finance for the supplier, including loansand advance payments.

Maintenance of accounts.

Collection of accounts.

Protection against default in payment bydebtors.

Issuing notice of assignment of thereceivables to debtors.


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Mechanism of factoring

There are three parties to a domestic

factoring arrangement:

The client who is supplier or seller of goods and

services.

The customer who is a debtor or buyer of goodsand services provided by the client.

The factor who is a financial institution orintermediary between client and customer who

provides the factoring services.


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Different factoring services

Sales ledger administration and credit

management.

Credit collection and protection againstdefault and bad debt losses.

Financial accomodation / assistance

agaist the assisned book debts.


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Different factoring services contd.

1. Credit administration/ management

Helps and advices the clients from the stage ofdeciding credit extension to customers to thefinal stage of bad debt collection.

Factor maintains an account for customers ofall items owing to them , so that collectioncould be made on due date or before.

Helps clients to decide whether to give ornotand, how much credit extent to the customers

Provides info to clients about market trends ,competition, and creditworthiness of customer.


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Different factoring services

contd.2. Credit collection and protection againstdefault

Factor undertakes all collection activitywhen individual book debts become duefrom the customer

Provides full or partial protection agaistbad debts


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Different factoring services contd.

3. Financial assistance/ accomodationagainst the assigned book debts

Factors provide financial assistance tothe clients by extending advance cashagainst book debts

Purchase the debts , allowing full creditprotection against any bad debts andprovide assistance against firms bookdebts


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Types of factoring servicing

Full service non-recourse (old line)

Full service recourse factoring

Bulk/agency factoring

Non-notification factoring.


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Full service non-recourse.

Factor undertakes to collect the debts from the

customer assuming 100 % risk.

Balance amount is paid to client at the end of

the credit period or when the customer pays thefactor whichever comes first.

The advantage of non recourse factoring is that

continuous factoring will eliminate the need for

credit and collection departments in the

organization.


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Full service recourse factoring

Client undertakes to collect the debts from the

customer.

If the customer don't pay the amount on

maturity, factor will recover the amount from theclient.

This is the most common type of factoring.

Recourse factoring is offered at a lower interestrate since the risk by the factor is low.

Balance amount is paid to client when the

customer pays the factor.


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Bulk/agency factoring

Also called disclosed factoring .

client's customers are notified of thefactoring agreement.

Disclosed type can either be recourse or

non recourse


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Non-notification factoring

Also called undisclosed factoring.

Client's customers are not notified of the

factoring arrangement.

Sales ledger administration and collection of

debts are undertaken by the client himself.

Client has to pay the amount to the factor

irrespective of whether customer has paid or not.But in disclosed type factor may or may not be

responsible for the collection of debts depending

on whether it is recourse or non recourse.


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Checking credit worthiness

Factor evaluated creditworthiness of the customer(buyer of goods).

Checking credit informationUsing :-

balance sheets, p/l account

Banks reference

Traders reference


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Credit limit

Credit limit is maximum credit which firmwill extend at any point of time.

The decision will depend upon thecustomer financial strengths.

The credit limit must be reviewed

periodically.

The firm should follow well laid downcollection policy.


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Example..

Siemens( India) sells about 85% of its

products through dealers and remaining

15% is sold directly to large corporate

customers. generally a 45 day credit is

extended to dealers but a lot of variation

exist for different dealers.


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Cost of factoring

These are two types of costs in factoringservices

1. Service Fee orCharges

Service fee is levied for the work involved inadministering the sales ledger as well as protection

against bad debts. The service fee for domestic factoring ranges from0.30 per cent to 0.75 per cent and it would be higherwhen non-recourse arrangements are made.


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Cost of factoring contd.

2. Discount Charge

The discount charge is levied on the advance providedby the factor and is computed on the basis of primelending rate.

It is calculated on a day-to-day basis on the advancesoutstanding,


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Benefits of factoring

The client will be relieved of the workrelating to sales ledger administration anddebt collection.

The client can therefore concentrate moreon planning production and sales.

Firm can save the cost of credit

administration.For the purpose of preventing defaults and

bad debts.


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Image of the client may suffer as engaging afactoring agency is not considered good sign ofefficient management.

Factoring may not be much use wherecompanies or agents have one time sales withthe customers.

Factoring increases cost of finance & thus cost ofrunning the business.

If the client has cheaper means of finance &

credit, factoring may not be useful.

Disadvantages ofFactoring


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Date post:	08-Apr-2018
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Factoring Servicing

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