Short Term Finance – Work Order Financing July 28, 2003Page: 1

Presentation On

Factoring of Accounts Receivable

By: Shamim Reza

Date: August 11, 2003

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Factoring of Account Receivables

Financing against invoices raised by the supplier after making the delivery successfully.

• Revolving Short Term Facility• Permanent Assignment of Payment • Financing against invoices• Post-delivery Financing

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1. Client assigns the payment against delivery to IDLC2. Client makes delivery to the Buyer against WO3. Client submits delivery challan and bill/invoice to Buyer4. Client submits delivery challan and bill/invoice to IDLC 5. IDLC makes advances to Client against the submitted invoices 6. Buyer makes payment to IDLC7. IDLC reimburses the balance amount

Mechanism

Mechanism

IDLC

Client Buyer3

2

567

41

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Portfolio of Customers

BUYER / CUSTOMER

BUYER / CUSTOMER

BUYER / CUSTOMER

BUYER / CUSTOMER

BUYER / CUSTOMER

SUPPLIER / CLIENT

• Sales Ledger Audit• Permitted Limit for each customer• Permitted Credit Term for each customer

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Sales Ledger Audit (SLA)

Party ledgers of last one year – customer wise We look for

Relationship since Monthly sales Monthly collection Deductions (%) Sales return (%)

Net Collection

Ave.MonthlyBalance

Ave. Monthly Sales Ave. Monthly Receivables Ave. Deduction

Ave. Receivable Turnover in days

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1. Assignment of Payment

Assignment Letter from the Client• STF Agreement between client and IDLC• Taking working capital financing from IDLC• Make all payments to IDLC in the following manner:

“IDLC A/C#559 (A/C: Client Name)”

• Irrevocable until further notice from IDLC• Request for confirmation letter

payment as per request

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Continued…

Assignment Letter from IDLC• STF Agreement between client and IDLC• Taking working capital financing from IDLC• Make all payments to IDLC in the following manner:

“IDLC A/C#559 (A/C: Client Name)”

• Irrevocable until further notice from IDLC• Request for confirmation letter

payment as per request Meeting with the customer/buyer Receiving payment confirmation from the buyer

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2. Delivery

The client submits invoices along with• Delivery challan• VAT challan (if any)

The Asst. Officers/ Officers check the submitted Invoices and Challans

Check list

3. Submission of Invoices/bills

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3. Financing

Inv. Amount Ad. Payment %X=

= Inv. Amount Ad. Payment %Dis. Balance[ ]•Due Invoices = Invoices outstanding till maturity (till the end of credit term)

•Overdue = Invoices outstanding beyond maturity, but not exceeding the grace period

•Overdue Disapprove = Invoices outstanding beyond grace period

•Sales Ledger Disapprove = Sales Ledger Balance – Permitted Limit

(if SLB > Permitted Limit)

Available Fund

Current A/C Balance X- -

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4. Collection against invoices Payment in the name of IDLC Invoice wise payment or lump sum payment Allocation of collected amount Checking – AIT deduction? other deduction?

5. Reimbursement of Balance Amount Reimbursement amount

= Invoice amount x Balance % - New Disapprove Balance On Line Approval (Disbursement memo) Issuing cheque in favour of the client

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Major Terms & Conditions

Credit Limit revolving limit [general and customer specific] client requirement & SLA data client’s forecast

Expiry – 1 year from Agreement; Renewable

Maximum Credit Term [general and customer specific] client requirement & SLA data client’s forecast

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Continued…

Service Charge (0.4%-0.7%) calculated on the gross invoice amount depends on bargaining power should be enough to cover service cost fair rate so that client retention rate is improved realized at the point of disbursement against invoices

loaded in the loan a/c immediately after

purchasing invoices

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Continued…

Factoring Discount (14.5%-15.75%)   depends on bargaining power calculated on daily loan balance should cover IDLC’s cost of fund should be fair rate so that client retention rate is

improved realized at each month end

loaded in the loan account

Expected Effective Rate varies from client to client usually around 17%-18%

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Book Keeping

Sales Ledger Control Account

Current Account (Loan Account)

For Client For Each Customer

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Security

Mandatory Assignment of payment (permanent assignment) Floating charge on receivables

(filing with RJSC in case of Ltd. Company) Personal guarantee from Directors Security cheque covering full sanctioned limit Recourse on the client

Optional Corporate guarantee (if necessary) Cash security (% of sanctioned limit) Equitable/registered mortgage on property Any other security

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Documentation Sanction letter Loan agreement Demand promissory note

Client promises to pay the sanctioned amount at given int. rate Letter of revival

Acknowledges the liability for payment of promissory note Letter of continuity

Agrees to execute DP note and other relevant documents Undertakes to remain liable on DP note and other docs

Undertaking Declares that they will not obtain any financing from any

person(s) and/or institution(s) against the assignment of receivables of the client without prior consent of IDLC.

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Continued… Letter of guarantee (Joint/Several) Extract of the Board resolution (if limited company) Notarised Irrevocable general power of attorney

Client empowers IDLC to collect, receive, deposit, encash, transfer the proceeds against all receivables of the client arising out of the business transactions with their customers

Deed of floating charge on receivable Client agrees to secure loan, amongst other means, creating a

priority floating charge on all book debts (receivables)

Form XIII duly filled up and signed by the client Corporate guarantee (if any) Deed of Mortgage & Undertaking (if any) Any other documents relating to any other collateral

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Marketing

Target Group Small and medium clients Minimum monthly turnover of Tk.1.0 million Frequent supply to few fixed customers Considerable invoice size Working capital crisis – growth prospect (cash purchase –

credit sale) Customers/buyers with consistent payment performance Suppliers with good reputation

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Continued… Current Portfolio

9

5

2

11

1

Printing &Packaging

Other Services

Transport

Construction &Engineering

Food & Beverage

Pharmaceutical

Other Manufacturing

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Continued…

How to Market Assessing the need of the prospect for working cap Convincing the prospect that Factoring will improve cash flow

and thus will increase the business volume Marketing the services – ‘follow up’ and ‘reporting’ IDLC’s experience in this field IDLC’s network – makes assignment process and collection and

follow up job easier Need basis financing – small amount and less probability to be

used otherwise Our service – prompt payment Flexibility – limit enhancement, increasing credit terms

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Continued…

No commitment fee – cab be cancelled anytime if not satisfied Ensuring confidentiality Package sale – advantages: security, less costly

Information Required MEMART, Form XII, financial statements, liability positions,

corporate profile, Directors’ profile, etc. Complete Sales Ledger (past one year)

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Problems Encountered

While marketing What is IDLC Reluctance to open their books (sales ledger) Interest rate – competing with banks Competing with traditional short term credit lines like CC, OD –

hastle free Reluctance to assign payment/ involve customers Reluctance to pay service charge Reluctance to provide security – only assignment of payment Interested to take financing against bad accounts only Reluctance to give security cheque

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Continued…

During Assignment (with Buyer) Difficult to get appointment – reluctance to meet IDLC (third

party) What is IDLC – to customers Does IDLC have permission for WO financing Payment can not be assigned only to ‘NBFI’ Time consuming – assignment for each WO, outside Dhaka Policy does not permit assignment Difficulty in obtaining confirmation letter (in case of MNCs

approval of parent company is required)

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Continued…

During Financing Does not understand the process of adjustment against

‘Disapproved Bills’ Request for financing against fresh bill even when negative

financeable amount

During Followup (with Buyer) Reluctance to talk to IDLC people – specially in the beginning Non-availability of contact person Number of phone calls for a single collection Difficulty in obtaining complete information

Contact person does not know Does not want to disclose to us (asks the client to contact)

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Continued…

Change of contact person Pressure from the client

During Collection Non availability of the contact person, even after confirming

over phone Lack of co-operation (does not provide invoice number, lump

sum payment) Fixed schedule for cheque hand over – some times difficult to

make it within the give time frame Must deposit the cheque within the banking hour (pressure

from the client) Collection from places outside the city

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Risks

Comparatively risk is low because of post delivery financing.

However, most commons risks are:

Direct payment – intentional / unintentional Arrangement between buyer and seller Fake invoices – false delivery Forgery – short supply End of relationship between client and customer

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Question

& & Answer

For more details go to:All public folder>Client Service (ST)>Customized>Operational Manual

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Thank U