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FACTORING

FACTORING. By NAVYA.V.R. Introduction . Factor is an agent who perform certain functions solely for purchasing the account receivables of business organizations so as to help them in meeting their working capital needs.

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FACTORING

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  1. FACTORING By NAVYA.V.R

  2. Introduction • Factor is an agent who perform certain functions solely for purchasing the account receivables of business organizations so as to help them in meeting their working capital needs. • The word “factor” came from the Latin word “facere” which means to do or get things done

  3. Meaning and definition • Factoring is a financial service rendered by a factor wherein business organization sells its accounts receivables/customers to a factoring firm and gets cash from the factor • The factor assumes the responsibility of collecting dues from accounts receivables/customers and in case of customers default it has to bear the bad debt . • The Unidroit convention on factoring defines as “an arrangement which includes at least two of the service namely of finance , maintenance of accounts , collection of debts and protection against credit risk”

  4. Process of factoring • Customer order received business organization delivers with invoice agreement with the factor organization sells the account receivables account to factor and intimates the payment that should be made to the factor by the customers.

  5. Methods of evaluation of factoring Two methods: • net benefit method • effective rate of interest method Net benefit method : net benefit = expected benefit – expected cost Effective rate of interest method: Effective rate of interest = net factoring cost / net advance factoring * 100

  6. Types of factoring • Recourse factoring : account receivables are purchased by the factors on the condition that any loss of bad will be borne by the business firm • Non recourse factoring: The factor has to bear the loss arising out of irrecoverable dues and the business gets the total protection under this form of factoring

  7. Contd… • Advance and maturity forecasting • Domestic factoring 1.disclosed factoring 2. undisclosed factoring 3. discount factoring • Export factoring • Cross border / international factoring • Full service factoring/ old line factoring • Bank participation factoring • Collection / maturity factoring

  8. Advantages • Reduction in administration cost • Increased return • Liquidity of firm is enhanced due to excellent working capital • Better credit disclosure • Facilitates exports • Firm’s uncertainty and risks of bad debts are reduced

  9. Limitations • It might indicate the in efficient management of firm’s receivables. • Lot of difficulties while judging the financial status of the firm. • Before engaging a factor, it is better to estimate the competitive cost of factoring

  10. Factoring in India CREDIT SALE OF GOODS CUSTOMERS CLIENT INVOICE PAYS THE AMOUNT PAY THE BALANCE PAYMENT UPTO 80% INITIALLY FACTOR

  11. Factoring in India Characteristics of factoring in India: • Period of factoring is 90 – 150 days. Some factoring companies allow even more than 150 days. • It is considered to be costly source of finance compared to other sources of short term borrowings. • Credit worthiness is evaluated based on financial strength of the customer (debtor). • Bad debts will not considered for factoring. • Cost of factoring = finance cost + operating cost. • Indian firms offer factoring for invoices as low as 1000 rs

  12. Different types of factoring of India • Disclosed factoring: client’s customers are notified of the factoring agreement. It can be either be recourse or non recourse. • Undisclosed factoring : client’s customers are not notified of factoring arrangement. client has to pay amount to the factor irrespective of whether customer has paid or not. • Recourse factoring • Non recourse factoring

  13. THANK YOU

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