chapters Name of the topic Page no

1 INTRODUCTION
2 LITERATURE REVIEW
3 RESEARCH METHODOLOGY
4 DATA ANALYSIS AND INTERPRETATION
5 CONCLUSION
6 BIBLOGRAPHY

7 CASE STUDY
A Comparative Study On Factoring
Service in India
CHAPTER.1 INTRODUCTION
 Factoring has a long and rich tradition, dating back 4,000 years. Almost every
civilization that valued commerce has practiced some form of factoring, including the
Romans who were the first to sell actual promissory notes at a discount. the first
widespread, documented use of factoring occurred in the American colonies before the
revolution.

With the advent of the industrial revolution, factoring became more focused on the
issue of credit, although the basic premise remained same. "by assisting clients in
determining the creditworthiness of their customer and setting credit limits, factors
could actually guarantee payments for approved customers. prior to the 1930s, factoring
in this country occurred primarily in the textile and garment industries, as the industries
were direct descendants of the colonial economy that used factoring so specifically.

As time is passing by, and we are moving into the modern era of instant
communication and a shrinking world, factoring plays an important role in the todays
business. the increasing interest rates that marked the 1980 and 1990 are led to an
increase in the number of new companies turning to the factoring business. Factoring
is a way to raise quick capital in a manner that was called off the balance sheet
financing. since accounts receivables are an asset account, factoring is a way to raise
quick cash without adding the liability of loan.

Factoring is one of the oldest forms of business financing. it can be regarded as a

cash management tool for many companies like garment industry where long
receivables are a part of business cycle. Factoring is a service that covers the financing
and collection of account receivables in domestic and international trade.
 It is an ongoing arrangement between the exporter and factor. the exporter sells
invoiced receivables at a discount to the factor to raise finance for working capital
requirement. t bridges the gap between raising an invoice and getting that invoice
paid. "obtaining payment of the invoices immediately from the factor, usually up to )0
per cent of their value the company(s cash flow is improved. the factor charges service
fees that vary with interest rates in force in the money market. he factor operates by
buying the invoiced debts from the selling company. these are purchased, usually with
credit control, collection and sales accounting work. thus the management of the
company may concentration production and sales and need not concern itself with
non/profitable control and sales accounting matters.

Factoring differs from a bank loan in three main ways. First, factoring differs from
traditional bank loans because the credit decision is strictly based on receivables rather
than other factors like how long the company has been in business, working capital and
personal credit score. secondly, factoring is not a loan it is the purchase of financial
asset. Finally, a bank loan involves two parties whereas factoring involves three/buyer,
exporter and factor.

There is some misconception regarding factoring like people believe factors are lender
of last resort but that is not true because exporters seeking out factoring are often in the
beginning stages of growth. At first glance, factoring appears to be expensive but does
a lot more in essence, factoring replaces the accounts receivables and credit department.
in the language of international conventions on factoring, 1factoring2 is defined
generally as a contractual relationship involving (a)supplier of goods and services, (b)
a Factor to which the supplier sells or assigns existing or future receivables arising from
contracts of sale of goods or services made between the supplier and its customers the
debtors, who are duly notified of the factoring contract.
 HISTORY OF FACTORING

Factoring as a fact of business life was underway in6ngland prior to 1400, and it came
to America with the Pilgrims, around 1680. It appears to be closely related to early
merchant banking activities. The latter however evolved by extension to non/trade
related financing such as sovereign debt Like all financial instruments, factoring
evolved over centuries. his was driven by changes in the organization of companies
technology, particularly air travel and non/face to face communications technologies
starting with the telegraph, followed by the telephone and then computers. these also
drove and were driven by modifications of the common law framework in 6ngland and
the united states

.Governments were latecomers to the facilitation of trade financed by

factors.6nglishcommon law originally held that unless the debtor was notified, the
assignment between the seller of invoices and the factor was not valid. The Canadian
Federal government legislation governing the assignment of moneys owed by it still
reflects this stance as does provincial government legislation modeled after it. As late
as the current century, the courts have heard arguments that without notification of the
debtor the assignment was not valid. in the united states, by 1949 the majority of state
governments had adopted a rule that the debtor did not have to be notified, thus opening
up the possibility of non/notification factoring arrangements

originally the industry took physical possession of the goods, provided cash
advances to the producer, financed the credit extended to the buyer and insured the
credit strength of the buyer. n 6ngland the control over the trade thus obtained resulted
in an Act of parliament in 1696 to mitigate the monopoly power of the factors. with the
development of larger firms who built their own sales forces distribution channels and
knowledge of the financial strength of their customers.
By he twentieth century in the united states factoring was still the predominant form of
financing working capital for the then high growth rate textile industry. in part this
occurred because of the structure of the banking system with its myriad of small banks
and consequent limitations on the amount that could be advanced prudently by any one
of them to a firm.

in Canada, with its national banks the limitations were far less restrictive and thus
factoring did not develop as widely as in the even then factoring also became the
dominant form of financing in the Canadian textile industry. "y the first decade of the
twenty first century a basic public policy rationale for factoring remains that the product
is well suited to the demands of innovative rapidly growing firms critical to economic
growth

A second public policy rationale is allowing fundamentally good business to be spared

the costly management time consuming trials and tribulations of bankruptcy protection
for suppliers, employees and customers or to provide source of funds during the process
of restructuring the firm so that it can survive and grow.
 MEANING OF FACTORING

Factoring is financial transaction and a type of debtor finance in which a business sells
its accounts receivable i.e., invoices to a third party called a factor data discount. A
business will sometimes factor its receivable assets to meet its present and immediate
cash needs. Forfaiting is a factoring arrangement used in international trade finance bye
‘porters who wish to sell their receivables to a forfeiter. Factoring is commonly referred
to as accounts receivable factoring, invoice factoring, and sometimes accounts
receivable financing. Accounts receivable financing is a term more accurately used to
describe a form of asset based lending against accounts receivable. the commercial
Finance Association is the leading trade association of the asset/based lending and
factoring industries.

Factoring is not the same as invoice discounting which is called an Assignment of

Accounts Receivable in American accounting as propagated by FASB-"within GAAP.
Factoring is the sale of receivables, whereas invoice discounting assignment of
accounts receivable in American accounting is a borrowing that involves the use of the
accounts receivable assets as collateral for the loan. Cow ever, in some other markets,
such as the Invoice discounting is considered to be a form of factoring, involving the
assignment of receivables, that is included in official factoring statistics. t is therefore
also not considered to be borrowing in the . In the the arrangement is usually
confidential in that the debtor is not notified of the assignment of the receivable and the
seller of the receivable collects the debt on behalf of the factor.

In the main difference between factoring and invoice discounting is confidentiality. -

cots law differs from that of the rest of the , in that notification to the account debtor is
required for the assignment to take place. The Scottish Law Commission is currently
reviewing this position.
DEFINITION

“Factoring is a service involving the purchase by a financial organization, called a

factor, of receivables owned to manufacturer and distributors by their customers, with
the factor assuming full credit and collection responsibilities”.

Factoring is a service of financial nature involving the conversion of credit bills into
cash.

CHARACTERISTICS OF FACTORING

1. Usually the period for factoring is 90 to 150 days. Some factoring companies
allow even more than 150 days.
2. Factoring is considered to be a costly source of finance compared to other
sources of short-term borrowings.
3. Factoring receivables is an ideal financial solution for new and emerging firms
without strong financials. This is because credit worthiness is evaluated based
on the financial strength of the customer debtor Hence these companies can
leverage on the financial strength of their customers.
4. Bad debts will not be considered for factoring.
5. Credit rating is not mandatory. "But the factoring companies usually carry out
credit risk analysis before entering into the agreement.
6. Factoring is a method of off balance sheet financing.
7. cost of factoring finance cost G operating cost. Factoring cost vary according to
the transaction size, financial strength of the customer etc. the cost of factoring
varies from 1.5% to 3% per month depending upon the financial strength of the
client*s customer.)
8. Indian firms offer factoring for invoices as low as 1000Rs
9. For delayed payments beyond the approved credit period, penal charge of
around 1.2% per month over and above the normal cost is charged it varies like
1%for the first month and 2% afterwards.
Definition of factoring

 Factoring is defined as a method of managing book debt, in

Which a business receives advances against the account receivables
From a bank or financial institution (called as a factor).
 There are three parties to factoring i.e debtors (the buyer of goods) the
Client (seller of goods) and the factor (financier) . factoring can be recourse
Or non recourse, disclosed or undisclosed.

In a factoring arrangement, first of all , the borrower sells trade receivables

To the factor and receives an advance against it .the advance provided to the
Borrower is the remaining amount, I,e. a certain percentage of the
receivable
Is deducted as the margin or reserve , the factor’s commission is retained by
Him and interest on the advance. After that, the borrower forwards
collections
From the debtor to the factor to settle down the advances received.
 PROCESS OF FACTORING

The factoring process can be broken up into two parts the initial account setup and
ongoing funding. Setting up a factoring account typically takes one to two weeks and
involves submitting an application, a list of clients, an accounts receivable aging report
and as ample invoice. The approval process involves detailed underwriting, during
which time the factoring company can ask for additional documents, such as I
documents of incorporation, financials, banks statements, etc. Of approved, the
business will be setup with a maximum credit line from which they can draw from. in
the case of notification factoring, the arrangement is not confidential and approval is
contingent upon successful notification a process by which factoring companies send
the business*s client or account debtor a notice of Assignment. the notice of
Assignment serves to

1 inform debtors that a factoring company is managing all of the business receivables

2 stake a claim on the financial rights for the receivables factored,

3 update the payment address usually a bank lock box

once the account is set up, the business is ready to start funding invoices. invoices are
still approved on an individual basis, but most invoices can be funded in a business day
or two as long a they meet the factor criteria receivables are fund in two part. The first
part is the “advance and covers 80%to85% of the invoice value. This is deposited
directly to the business bank account .the remaining 15% to 20% is rebated less the
factoring fees as soon as the invoice is paid in full to the company
 Common factor terms
A) DISCOUNT RATE OR EACTORING EEE

The discount rate is the fee a factoring company charges to provide the factoring
service. Since a formal factoring transaction involves the outright purchase of the
invoice, the discount rate is typical stated as a percentage of the face value of the
invoices. For instance, a factoring company may charge 5% for an invoice due in 45
days. In contrast, companies that do accounts receivable financing may charge per week
or per month. Thus, an invoice financing company that charges 1% per week would
result in a discount rate of 6-7% for the same invoice.

B) ADVANCE RATE

The advance rate is the percentage of an invoice that is paid out by the factoring
company upfront. The difference between the face value of the invoice and the advance
rates serves to protect factors against any losses and to ensure coverage for their fees.
Once the invoice is paid, the factor gives the difference between the face value, advance
amount and fees back to the business in the form of a factoring rebate.

C) RESERVE ACCOUNT

Whereas the difference between the invoice face value and the advance servesas a
reserve for a specific invoice, many factors also hold an ongoing reserve account which
serves to further reduce the risk for the factoring company.

This reserve account is typically 10-15% of the seller's credit line, but not all factoring
companies hold reserve accounts.

D) LONG-TERM CONTRACTS AND MINIMUMS

While factoring fees and terms range widely, many factoring companies will have
monthly minimums and require a long-term contract as a measure to guarantee a
profitable relationship. Although shorter contract periods are now becoming more
common, contracts and monthly minimums are typical with "whole ledger" factoring,
which entails factoring all of a company's invoices or all of the company's invoices
from a particular debtor.
E) SPOT FACTORING

spot factoring, or single invoice discounting, is an alternative to whole ledger and

allows a company to factor a single invoice. the added flexibility for the business, and
lack of predictable volume and monthly minimums for factoring providers means that
spot factoring transactions usually carry a cost premium.

F) NOTIFICATION S" NON!NOTIFICATION

Factoring has traditionally operated under a mandatory notification arrangement. This

involves the factoring company notifying the seller*s clients about the factoring
relationship and requiring future payments to be made to the factoring company. today,
many factoring companies also offer a non/notification option that allows sellers to
advance their invoices without involving a third party.
 Specialized factoring
with advances in technology, some invoice factoring providers have adapted to specific
industries. this often affects additional services offered by the factor in order to best
adapt the factoring service to the needs of the business. An example of this includes a
recruitment specialist factor offering payroll and back office support with the factoring
facility a wholesale or Distribution factor may not offer this additional service. Hese
differences can affect the cost of the facility, the approach the factor takes when
collecting credit, the administration services included in the facility and the maximum
size of invoices which can be factored.

REAL!ESTATE

snice the 2007 united states recession one of the fastest growing sectors in the factoring
industry is real estate commission advances. commission advances work the same way
as factoring but are done with licensed real estate agents on their pending and future
real-estate commissions. commission advances were first introduced in Canada but
quickly made its way to the united states. typically how the commission advance
process works is they apply online, sign contracts selling their future real estate
commissions at a discount, and then the funds are wired to their bank account.

MEDICAL FACTORING

The healthcare industry makes for a special case in which factoring is

much needed because of long payment cycles from government, private
insurance companies and other third party payers, but difficult because of
requirements. For this reasons medical receivables factoring companies
have developed to specifically target this niche.

CONSTRUCTION

Factoring is common place in the construction industry because of the long

payment cycles that can stretch to 120 days and beyond. Cow ever, the
construction industry has features that risky for factoring companies.
"because of the risks and exposure from mechanics liens, danger of
paid/when/paid terms, existence of progress billing, use of withholding,
and exposure to economic cycles most generalist factoring companies
avoid construction receivables entirely. hat has created another niche of
factoring companies that specialize in construction receivables.

TRUCKING

Factoring is often used by trucking companies to cover upfront expenses,

such as fuel. Factoring companies that cater to this niche offer services to
help accommodate truckers on the road, including the ability to verify
invoices and fund on copies sent via scan, fa' or email, and the option to
place the funds directly onto a fuel card, which works like a debit card.
rucking factors also offer fuel advance programs that provide a cash
advance to carriers upon confirmed pickup of the load.
 Factoring mechanism
A factor provides finance to his client up to a certain percentage of the unpaid
invoices which represent the sales of goods or services to approved customers. the
mechanism of the factoring scheme is as follows

1. Invoice the client ( which sells the goods and services to trade customers in
credit) and the factor , which is the financing organization.
2. When ever the client sell gods to the trade customers on credit he prepares
invoices in the usual way
3. The goods are sent to the buyers without raising a bill of exchange but
accompanied by an invoice
4. The debt due to the purchaser to the client is assigned to the factor by advising the
trade customers to pay the amount due to the client, to the factor.
5. The client hand over the invoices to the factor under cover of a schedule of offer
along with the copies of invoices and receipted delivery challans.
6. The factors makes an immediate payment up to 80% of tbe assigned invoices and
the balance 20% will be paid on rea realization of the debt.
TYPES OF FACTORING

Depending upon the features built into the factoring transaction, there can be different
forms of factoring arrangements. We shall discuss about the following forms:

j. Recourse factoring

k. Non-recourse factoring

l. Maturity factoring

m. Advance factoring

n. Invoice discounting

o. Full factoring

p. Bank participation factoring

q. Supplier guarantee factoring

r. Cross-border factoring.

The following features are, of course, common to most of the factoring arrangements:
(1) the factor is responsible for collection of receivables; and (11) the factor maintains
the sales ledger of the client.

The additional feature(s) built into the different types of factoring arrangements are
discussed here:

Supplier Guarantee Factoring

This arrangement was developed by the American factors primarily to help their
importers/distributors involved in executing import orders on behalf of their customers.
The typical steps involved are as follows:

I. The customer places an import order with the distributor.

II. The distributor seeks the approval of the factor for extending credit to the
customer.
III. On receiving the credit approval from the factor, the distributor makes
arrangements for shipping the supplies directly to the customer.
IV. The factor guarantees payment to the foreign supplier in respect of the specific
shipment. Upon shipment, he credits the account of the distributor and debits
the account of the customer for an amount equal to the invoice value of the
goods shipped plus distributor's ii. commission. S
V. Instead of making an advance payment to the distributor against the customer's
account that has been factored, the factor pays the supplier directly for the
invoice value of the goods shipped.
VI. The factor follows up with the customer, collects the amount due and makes
the final payment to the distributor after deducting his commission and
guarantee charges.

Thus, apart from offering the usual services, the factor guarantees payment to the
supplier on behalf of his client (the distributor) thereby engendering greater
confidence in supplier-distributor dealings
Cross-border Factoring

The mechanics of Cross-border Factoring (also referred to as an international

factoring or export factoring) is similar to domestic factoring except that there are
usually four parties to the transaction - exporter, export factor, import factor and
importer. (See Figure 12.2) Under this system of factoring referred to as the two- factor
system of factoring, the exporter (the client) enters into a factoring agreement with the
export factor domiciled in his country and assigns to him export receivables as and
when they arise. The payment against the factored debts are made exactly in the same
way as under a domestic factoring facility. If the sale value is denominated in the
currency of the importer's country, the factor usually covers the exchange risk
associated with the remittances.

The export factor enters into an arrangement with a factor based in the country
where the importer resides (import factor) and contracts out the tasks of credit checking,
sales ledgering and collection for an agreed fee. The debt is usually not assigned to the
import factor. The relationship between the import factor and the importer (the
customer) is clarified by a notation on the sales invoice that the payment is to be made
directly to the import factor. The import factor collects the amount from the customer
and remits it to the export factor.
 Factoring services in India
Though factoring services have been introduced since 1991 in India still it
suite new in the sense that factoring product is not widely known in many parts
of the country. Recognizing the utility of factoring services for small and
medium size industrial and commercial enterprises in India, for the first time the
vaghul committee which submitted its report on the money Market,
recommended the development of a system of factoring of open account sales
particularly for the small scale industrial units

This committee further observed that both banks and non/bank financial
institutions in the private sector should be encouraged to set up institutions for
providing factoring services. later, the Kaylanasundaram committee, which was
appointed by the Reserve "bank of India(RBI) in 1998 specifically for exploring
the possibilities of launching factoring services in India, found an abundant
scope for such services and hence strongly advocated for the introduction of
factoring services in India. this committee also observed that banks were ideally
suited for providing factoring services to the industries in the economy. cower,
the said committee expressed the view that to begin with only four or five banks
either individually or jointly should be allowed on zonal basis to undertake
factoring services.

The recommendations of kalyanasundaram committee were accepted by

the RBI subsequently a suitable amendment was made in the "banking
Regulation Act 1949, so as to allow banks to set up subsidiary company for
undertaking factoring services. To begin with, the RBI permitted both the state
"bank of India and canara bank to start factoring services through their own
subsidiaries. Accordingly, two factoring companies in India, i.e.-" Factors and
commercial -services ;td. and canbank Factors ;ltd sponsored by the state bank
of India and canera bank respectively, commenced operations in 1991
 however, later on, the RBI lifted these area restrictions on their operations
and accordingly, both these companies were given permission to expand and
operate their business in other parts of the country. In view of this, they can
operate on all/ India basis. In 1993 the RBI allowed all the scheduled
commercial banks to introduce factoring services either departmentally or
through a subsidiary set/up. "besides SBI Factors and commercials services and
canbank Factors ;td., there are a few non/banking finance companies such as
Formost Factors ltd global trade Finance pvt.td. (a subsidiary of
6P L"ank and ntegrated Financial services ;td., which are also in the business
of domestic factoring in India. of these, global trade Finance pvt. ;td. and
Formost Factors ;td. have undertaken the business of export factoring also.
"besides these non/banking finance companies, small Industries development "a
bank of India , Hongkong and Shanghai "Banking Corporation have been
offering factoring services to their clients. Almost all of them have been
providing factoring services to the -SSI and non/-SSI units.
FACTORING COMPANIES IN INDIA

1. CANREA BANK FACTOR LIMITED

2. SBI FACTORS AND COMMERCIAL SERVICES PVT LIMITED

3. THE HONG KONG AND SHANGHAI BANKING CORPORATATION

LIMTED

4. FOREMOST FACTORS LIMTED

5. GLOBAL TRADE FINACE LIMITED

6. EXPORT CREDIT GURANTEE CORPORATION OF INDIA LIMITED

7. CITIBANK INDIA

8. SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA

9. STANDARD CHARTED BANK

ADVANTAGES OF FACTORING

• LARGER AMOUNTS:

Because accounts receivable factoring is based primarily upon accounts

receivable, small businesses with large amounts of accounts receivable for goods
orservices sold to financially strong customers can often obtain a bigger line than they
would qualify for with conventional bank lenders. This is because factoring is based on
the credit strength of your customers. Banks look more at your businesses credit
strength to support their loans. Consequently, often factoring companies can provide
more financing more quickly than banks.

• QUICKER SET UP AND FUNDING:

Most accounts receivable factoring lines can be approved, set up, and actively funded
in just a few weeks. Banks typically require more time to perform their credit review
of your company... perhaps even waiting for upcoming fiscal period closes or audit
results. The faster set up of accounts receivable factoring lines is because factoring
companies have simpler more streamlined underwriting requirements.

• EXPANDS QUICKLY WITH GROWTH:

Most factoring companies can expand their financing for you as fast as your business
grows, even if your company has little track record performing that much business.
Factoring companies have no bureaucracy hindering the increase oaf line size. So you
are not likely to "outgrow your line" as easily. Just be sure you have a factoring
company big enough to accommodate your growth ambitions.

• NOT ALOAN:

A factoring company is not making loans. They are purchasing the accounts receivable
with cash. This has the same result of increasing working capital but many accountants
would not show this as a liability on the balance sheet the way a bank loan would
appear. So factoring, instead of borrowing, reduces balance sheet debt resulting in a
lower debt to equity ratio.
• LESS COSTLY THAN EQUITY:

In need of financing many businesses turn to equity investors. For some business
investment and expansion purposes, there is no substitute for equity capital. However,
most equity investors expect higher returns than the costs of accounts receivable
factoring and new equity contributions dilute the ownership stake of existing owners
often even shifting control. Most factoring arrangement have no dilutive effect on
shareholders.

• IMPROVES YOUR TURN:

Many factoring companies verify invoices with your customers and follow up promptly
if your invoices are not paid on time. These gentle reminders to your customers usually
result in more timely payments and it frees you and your staff up from having to perform
these administrative tasks to focus on your product or service delivery
DISADVANTAGES OF FACTORING

• MORE EXPENSIVE THAN ABANK LOAN:

Accounts receivable factoring is more expensive than bank financing because of the
transactional work with the invoices the factoring company does to advance more
money more quickly. Costs vary significantly between factors and comparing rates and
fees can be challenging. Consequently, invoice factoring cost drivers need to be
carefully understood.

• SHRINKS AS BUSINESS CONTRACTS:

Factoring can grow rapidly with you but also contracts as quickly if your business is
contracting. So factoring may not be a good solution for businesses with great
seasonality or other significant downward fluctuations in revenue.

 NOTIFICATION:.

Factoring companies typically require that you assign the accounts receivable to
them. This means that your customers' accounts payable departments will be notified
to send payments to the factoring company's lockbox. Some businesses are concerned
this will affect their customer relationships but factoring is such a commonly used form
of financing that a professionally delivered factoring service rarely draws much notice
from customers. Typically, the process is routinely handled in the Accounts Payable
department. However, it is important to thoroughly understand the terms of a factoring
agreement to know if costs or delays in payment may result from the notification
process.

FEATURES OF FACTORING:
The features of factoring have been explained below:-
1. It is very costly
2. In factoring there are three parties: The seller, the debtor and the
factor.
3. It helps to generate an immediate inflow of cash.
4 Here the full liability of debtor has been assumed by the factor.
5 Factors has the right to take any legal action required to recover the
debts.
 OTHER TYPES OF FACTORING

There are two types of factoring undertaken here:

1. Domestic factoring
2. Export factoring
3. International Factoring

1) DOMESTIC FACTORING

BILL 2 CASH (RECEIVABLES FACTORING FACILITY)

Bill 2 Cash is a domestic factoring facility offered by us where the seller invoices the
goods to the buyer, assigns the same to SBI Factors and receives prepayment up to90%
of the invoice value immediately. The balance amount is paid to the client when the
customer pays us

RECOURSE FACTORING:

In recourse factoring, seller undertakes to collect the debt from the buyer. In theevent
of the buyer failing to pay the amount on maturity, factor will recover the amount from
the client.

NON RECOURSE FACTORING;

In Non recourse factoring, factor undertakes to collect the debts from the buyer. In other
words, in case the buyer fails to pay, the factor will have 'no recourse to the seller and
will absorb the bad debts himself.

B) EXPORT FACTORING

Our Export Factoring service offers you a complete package to help you develop
your overseas business profitably and with confidence

Under Export Factoring, we factor invoices drawn on overseas buyers and make
prepayment of up to 90% of the invoice amount, immediately.Under two-factor system,
the factor handling the collection of export receivables of clients (exporters) is called
Export Factor (EF) and the factor in buyer's country who undertake collection and credit
protection services is called Import factor.
The following steps are involved:

• The exporter ships the goods to importer.

• The exporter assigns his invoices through the export factor to the import factor

who assumes the credit risk. (as per prior arrangement).

• The Export factor prepays invoices

• The importer pays the proceeds to the Import factor, who transfers the amount to

Export factor

• The export factor deducts prepayment already made, other charges and pays the

balance proceeds to the exporter.

The benefits accruing to you from Export Factoring would be:

• 100% credit cover, as compared to 80% offered by export credit agencies. (In case

you get the facility from a bank, you will have to go in for an ECA cover.)

• Claims will be settled in invoice currency, as against in domestic currency in case

of bank finance.

C) INTERNATIONAL FACTORING

In international factoring there are usually two factors. The export factor looks at
financing the exporter and sales administration (presenting invoices at the right time,
collecting payments being the key tasks). The import factor is interested in evaluating
the buyer, collecting the money on time at the same time ensuring that he is protected
against default.

International factoring encompasses all the four services, that is, pre-payments, sales
ledger administration, credit protection and collections.

Guide to International Factoring:

The importer places the order for purchase of goods with the exporter.
The exporter requests the Export Factor for limit approval on the importer. Export
Factor in

Turn forwards this request to an Import Factor in the Importer's country. The importer
factors

Evaluates the Importer and conveys its approval to the export factor who in turn
conveys

Commencement of the factoring arrangement to the exporter

The exporter delivers the goods to the importer

Exporter produces the documents to the exporter factors

The exporter factor disburses fund to the exporter up to the prepayment amount
decided and at the same time the forwards the documents to the importer and the
importer.

The invoice the exporter receives the balance payment

CHAPIER.2 LITERATURE REVIEW
Ron kiss ling is Managing principal of the pyramid consortium, a financial services
consulting group, and a former chairman of Factors chain international. of anyone
knows about factoring, he does. Ce talks here about background and recent trends in
the industry.

Factoring has prospered for thousands of years due to its adaptability .Historically,
the distinctive qualities of this product have proven it to be one of the most flexible
finance tools in supporting trade. today, factoring supports almost trillion of annual
trade from over 60 countries

. the definition of factoring can be found in the work of the international institute for
the unification of private l;aw that is commonly known as UNIDROIT.UNIDROIT
was formed over 8 years ago to promote the international congruity of commercial
law.

Accor1ing to UNIDROIT6 factoring must have three characteristics

First, there must be the provision for the assignment of debts arising from the sale of
goods or services within a commercial contract. Factoring is not usually associated
with consumer debt

second, there must be a stipulation to provide for notification to be given to the

debtors of the assignments.

Third, the factor 3the company performing the factoring service must perform at least
two of the following services.

1. Finance
2. .debtor account maintenance.
3. Debt collection.
These characteristics provide the flexibility for factoring to be used either as finance
tool or an administrative resource to support trade. the two are typically combined to
create a formidable trade product with multiple benefits.

There are numerous variations and names by which factoring is known. Factoring*s
adaptability to different country*s legal, economic and banking environments is a
logical outgrowth of its unique characteristics and services. the capacity to add or
remove services when developing factoring for a specific need has increased its
penetration into new markets

. This flexibility can lead to misunderstandings. As variations of factoring are given

new names there is often confusion regarding the type of product being offered. tHe
following names are examples that are used with factoring depending upon the product
features maturity, non/recourse, recourse, settlement date, invoice discounting, and
bulk factoring.

Factoring with identical benefits in one country may be called something different in
another. invoice discounting, also known as confidential factoring in most of 6urope, is
known in the united states as accounts receivable financing. A complete list of names
and service variances with regard to factoring would be voluminous.
The Concept and Features of the Factoring Contract
 Features The characteristics of the factoring contract, which 1S a reciprocal,
onerous, compound (Georgia is, 2000:134; Psych Omanis, 1996:160,
Valentia’s, 2012:211) and continuous (or standing) contract (Psych Omanis,
1996:160), are the following: Only banks which have their headquarters in
Greece and operate legally in this country may practice factoring. Factoring
may also be practiced by corporations which have been set up precisely for
this purpose (Art. 4, para. 1 L. 1905/1990) (Skalidis/ Valentia’s, 2012:412).
For setting up those special corporations, known as factoring
corporations, a special permit issued by the Bank of Greece is required and
their capital may not be smaller than one fourth of the minimum capital
required for setting up banking corporations.
 These corporations are under the supervision and control of the Bank of
Greece (Art. 4, para. 2 L. 1905/1990). The factoring contract contains
especially the following: a. the assignment to the factor on the part of the
supplier of the latter's claims against his clients; b. the authorization of the
factor by the supplier to receive payment for the latter's claims; c. the factor's
financing of the supplier by way of paying him his claims in advance; d. the
factor's follow up (from an accounting and legal point of view) of the
supplier's claims against the clients of the latter; e. coverage, in part or in
whole, on the part of the factor of the credit risk the supplier runs (Art. 1, para.
1 L. 1905/1990). John Valentia’s et al. / Procedia Economics and Finance 5
(2013 ) 757 762 759 The relation created between factor and supplier is a
continuous one because the claims assigned to the factor or the claims which
the supplier authorizes the factor to collect concern both already existing
claims the supplier has against his clients and claims to be born in the future
(Georgia is, 2000:123).
 Usefulness of the Factoring Contract Factoring offers the supplier a number of
services: it makes available to him immediate liquidation of his business
claims, their effective management and satisfaction, assessment of the credit
worthiness of his current clients as well as of future ones, coverage for the
credit risk the supplier takes with his clients, and advisory services in matters
of management of the operating capital (Valentia’s, 2013:1487).
 Types of Factoring Contracts The most important distinction of factoring
contracts is the distinction between genuine and non-genuine. The difference
between these two types is the following: In the genuine factoring contract the
factor undertakes the risk of the debtor's insolvency, whereas in the non-
genuine one the risk of the debtor's solvency remains with the supplier (Georgia is,
2000:124; Vat his, 1995:25; Psych Omanis, 1996:47; Valentia’s, 2012:211;
Valentia’s, 2013:1480).
 Chapter 3:RESEARCH AND
METODOLOGY
 RESEARCH AND METODOLOGY

Research design

The design is the structure of any scientific work. It gives direction and
systematizes the research

There are two main approach to a research problem,

Quantitative research

Qualitative research

Research method:

Literature review

data collections:

primary data :

primary data is basically the live data which is collected on filed while interacting
with the customers and is shown as a list of question

secondary data:

it have been used for the research like through interest ,newspaper magazines
 Working of factoring
Factoring provides a fast prepayment against your sales ledger. it allows you, ate
cost, to flexibly increase your working capital and improve cash flow.

Factoring is offered to businesses trading with other businesses on credit terms.it

is not normally available to retailers or to cash traders.

First, importer places an order with the exporter.

Secondly, exporter gives the details of the transaction to the factor.

Thirdly, exporter dispatches the goods to the importer and sends an invoice well to
pay the amount on due date to the factor.

Exporter submits the copy of invoice to the factor

Factor pays the amount to factor on due date

Factor pays the balance to client

Growth of the factoring industry in India

Slow growth reasons

The overall worldwide growth in factoring is estimated at 12%. Europe has the
largest market representing 64% of the world volumes with a growth of 18% during the
year. Americas growth was 10%, whereas Australia recorded impressive growth of 40%
.Asia saw a fall in volume.

The growth trends mentioned above support the fact that there is enormous
scope for expansion worldwide and India is no exception to this. the potential in India
is estimated at an annual turnover of Rs15000 to Rs20000cr but large portion is
untapped because of the following reasons .

Factoring is a standalone product Factoring is similar to "ill 5iscounting/!hat

people fail to understand is that though it is similar only in one aspect, i.e., both provides
short term finance against receivables, factoring also provides a package of other
services.
 Non/Recourse factoring is almost missing Recourse factoring only provides
financing but not credit covers, whereas in case of non/recourse factoring, in the event
of default of a customer, the factor will bear the risk of bad debt. Cow ever, the facility,
which will attract more clients, is almost missing, in India customers are still not aware
of factoring services’ Factors have not been successful in creating awareness about the
concept of factoring. the difference between factoring and bills discounting is still not
clearly understood. the customers are still not aware of the extra benefits and services
they can enjoy through factoring they are not demanding these services from factoring
service providers.

FUTURE PLANS OF GROWTH OF FACTORING ININDIA$

The long held view that India is just a services hub is also changing fast. India
manufacturing sector is making rapid strides and could really be the base for the
heatwave of growth. there is a well/known saying in investment circles that you should
invest in an emerging economy when the first international airport is built and you
should exit when the second airport comes up i.e., exit at the first signal of
over/investment. china may soon reach the second airport stage. in that event.

India would make an even bigger potential growth story in the years to come. India
is evolving from a command economy focused on self/sufficiency to becoming key link
in the global economic chain

.India is well positioned by geography, language, and historical association to

service customers in advanced economies. India also has historical trading links with
the Liddle 6ast and Africa as well as its own south Asian neighbors.

As the manufacturing base of a country expands, the scope for factoring also
increases. At the micro level, factoring is tailor/made for a company on the path of
high/octane growth just as at the macro level it is suited for a growing economy like
India. There is only one direction in which factoring can go in India upwards. As the
awareness level about the benefits of factoring increases, factoring will spread its wings
across the length and breadth of the country.
 LIMITATIONS

The basic disadvantage of is that it may lead to ruined relations with the customers
especially if factor engages in aggressive or unprofessional practices when collecting
accounts oust is another disadvantage, cost involved in factoring agreement may be
more than the cost of other methods of financing available in the business.
CHAPTER: 4 DATA ANALYSIS AND INTERPRETATION
 Statistics for factoring volumes are gathered by FCI on a yearly basis with the
assistance of its local members

Figures available relate to factoring volume per country including an overview of

the estimated number of active factoring companies per country (regardless of
whether they are members). Figures indicating the total figure per country over the
past seven years are also available.

There is also an overview of the accumulative total turnover for FCI members over
the last seven years and compares these to the worldwide figures for all factoring

GROWTH OF FACTORING IN INDIA

INTRODUCTION

Factoring is a financial transaction whereby a business sells its accounts receivable

3i.e., invoices to a third party 3called a factor at a discount in exchange for immediate
money with which to finance continued business. Factoring differs from a bank loan in
three main ways. First, the emphasis is on the value of the receivables3essentially a
financial assets, not the firm’s credit worthiness. secondly, factoring is not a loan / it is
the purchase of a financial asset 3the receivable. Finally, a bank loan involves two
parties whereas factoring involves three.

Factoring enables you to:

Instantly turn your receivables into cash.

Vial credit protection for your receivables.

Take well informed credit decisions.

Outsource your sales ledger administration.

Factoring thus not only helps you in expanding your business ,but also provides
you with an efficient collection mechanism and protection against bad debts.

The three parties directly involved are the one who sells the receivable, the debtor,
and the factor. the receivable is essentially a financial asset associated with the debtor*s
;inability to pay money owed to the seller usually for work performed or goods sold,
the seller then sells one or more of its invoices the receivables at a discount tithe third
party, the specialized financial organization aka the factor, to obtain cash.

CHARACTERISTICS OF FACTORING

usually the period for factoring is 90 to 150 days. come factoring companies allow even
more than 150 days.

Factoring is considered to be a costly source of finance compared to other sources of

short term borrowings.

Factoring receivables is an ideal financial solution for new and emerging firms without
strong financials. This is because credit worthiness is evaluated based on the financial
strength of the customer debtor. Cense these companies can leverage on the financial
strength of their customers.

bad debts will not be considered for factoring.

Credit rating is not mandatory. "ut the factoring companies usually carry out credit risk
analysis before entering into the agreement. Factoring is a method of off balance sheet
financing. Cost of factoring finance cost G operating cost. Factoring cost vary
according to the transaction size, financial strength of the customer etc. the cost of
factoring varies from 1.5% to 3% toper month depending upon the financial strength of
the client customer.

Indian firms offer factoring for invoices as low as 1000Rs

For delayed payments beyond the approved credit period, penal charge of around 1-2
per month over and above the normal cost is charged it varies like 1% for the first month
and 2% afterwards.

Objectives OF FACTORING

 To know who are providing the factoring facility

 To know the condition of the firms using the factoring facility.
 To know the factors responsible for the growth of factoring in India.
 To know the effect of growth of factoring in India.
 To know as to how the firms are getting benefit by using the factoring facility.

.
 With the shipment, the exporter's bank in India sends the relevant documents to the
importer's bank. The importer's bank supplies them to the importer when the importer
produces the availed promissory notes to the bank. In this context let us discuss what
analyzation is all about. Bill of exchanges in forfaiting transactions are backed by the
Co acceptance of the banker of the foreign country, or in other words the banker of
the importer.

The Co-acceptance is also known as availization. After the submission of the

documents they are sent to the exporter by the bank. The Indian exporter has to
endorse the note with Without Recourse" clause Without recourse debt is a kind of
debt instruments on which the right of recourse (or, reverting in 37 case ofa difficulty
in collection back to the originator) has been surrendered by the buyer. These without
recourse notes are sent back to the forfaiting agency by the EXIM Bank. On receipt
tof these papers the forfaiting agency, after verifying the signature of the avail
releases payments at a discounted value in consultation with the EXIM Bank. The
transaction is done through the nostro account of the exporter's bank in the country
where the forfaiting agency is located. After the Overseas bank receives the proceeds,
it transfers them to the exporter. All these are performed at the instructions given by
the EXIM Bank. Immediately after the inward remittance of the funds, the exporter is
issued a Certificate of foreign inward remittance. On maturity of the Bills of
Exchange or the Promissory notes, the forfaiting agency presents certain documents to
the Co-acceptor for payments.

Costs involved in a transaction of Forfaiting

A transaction of forfaiting involves different types of fees and charges. The

fee charged by the forfeiter depends on the relationship with the exporter, volume of
trade and above all the cost of funds of the forfeiter. The fees that come into play
during a transaction of forfaiting fall into three broad categories.

 Commitment Fee:: A commitment fee is s payable to the forfeiter by the

exporter in consideration of the commitment made by the forfeiter to execute
a particular transaction of forfaiting at a particular discount rate and within a
specific time. The commitment fees range between 0.5-1.5 per annum. It is
always calculated on the unutilized amount of the forfaiting transaction.
Irrespective of the execution of the export contract, the commitment fees are
required to be paid.
 Discount Fees: It : is the cost payable on the credit promised under the
factoring deal for the total period of credit under consideration. It is payable
by the exporter to the forfeiter. Instead of charging the same separately, the
forfeiter deducts it from the amount it owes to the exporter against the
promissory note or bills of exchange, as the case may be. Discount rate is
arrived at based on the London Inter Bank Offered Rate (LIBOR) for the
period under consideration.
The forfeiter pays the exporter the money almost instantly, but it has to wait
quite some time to recover the same from the importer. During the
intervening period, the adverse movements in the international currency
market may wipe out the profits of the forfeiter. Softhis also includes the
 possible loss/gain that can be expected due to changes in the exchange rates in
the intervening period.
 Documentation Fees: Documentation fees are generally charged for
transactions involving elaborate legal formalities and complexities and they
may not be charged when the legal procedures and the documentation
required are low.
CHAPTEER.5 CONC CLUSIONS
 Factoring should be used by the firms by keeping in view the financial position of
the factor.

At the end it is to be concluded that factoring is now gaining its importance in

India slowly with the increase in customers access to benefits of factoring . India’s
future in factoring business seems to be luring on the facts obtained regarding the fast
growth of $E4 H in only 4 years .-o for factoring to be successful in India government
regulation policies need to be modified further so that more and more private players
can come forward to start up their factoring business in India .customer awareness about
benefits of factoring is to be increased further to fight back the global leaders in
factoring business.
CHAPTER .6 Bibliography
BIBILOGRAPHY
WEBSITES

http://economictimes.indiantimes.com

https://searchwarp.com

www.wikipedia.com

https://economictimes.indiantimes.com

list of books referred

financial services –BY M.Y.KHAN

financial management –by I.M.PANDEY

CASE STUDY

Ajit Jain owns an IT Industry named ‘Info-Solution Pvt Ltd’ situated in Pune. His
Previous year’s Net Profit is Rs 9.2 Cr. He is running this business Since 2011. His
business is leading into IT Services and is earning a huge profit. Since he always
faces a working capital crunch, he constantly needs funds for running his company
efficiently. He has recently provided software services of Rs.20 lakhs to a
renowned Company and has accepted the credit period of 60 days. Meanwhile, he
has received another order for which he lacks funding. The new order is
amounting to Rs.12 lakhs which is again quite a huge order.

GENERAL INPUTS

Company name Info-solutions pvt ltd

Commencement year 2011

Turnover RS 9.5 cr

Mortgage available None

Industry type Service industry

After After analyzing the company’s balance sheet, he came across that company
does not have any assets which can be given as collateral. Thus, helpless for
secured funding. He is confused and unable to decide the exact way for funding.
While discussing with one of his friends, he came across Trekker Capital. That is
one of the best funding solutions providers in India. Soon he fixed a meeting with
us.
Analyzing Business:

Our team of experts examined the case and asked for companies’ financial
statements. After studying the financials, we came to the conclusion to provide a
Factoring Funding Solution to his company. The balance sheet had no asset for
collateral but showed heavy Account Receivables i.e. more than the required
amount. Mr. Ajit was unaware of the concept of finance like Factoring and was
contented after getting assistance.

Factoring is the financial instrument or debtor finance in which the seller sells its
accounts receivable to a third party called ‘factor’ at a discount. There are three
parties involved in such transactions: the customer, the debtor, and the factoring
company. In simple words, it is the selling of unpaid invoices for the requirement
of instant cash.
Our analysis

Financial instruments Factoring

Total time for execution 3-4 days

amount disbursed immediately 80-90% of the invoice amount

(depend upon credit score)

Lock in period ( credit period) 60 days

Roi 5—15%

Company rating for services 4.5/5

(Note- The ROI varies as per the market conditions)

We chose the best suitable Lender (Factoring Company) and forwarded the required
documents of the customer to them. Soon, they transferred 85% of the invoice value
as their debtor was creditworthy. After said credit period the debtor executed the
payment and Mr. Ajit received the remaining amount less their discount/fees.
Although there are discounting charges/fees for factoring, they provide around 80–
90% of the cash instantly. The amount totally depends upon the creditworthiness of
the debtor as he will be the responsible person for payment at maturity.
The solution to factoring funding at Trekker Capital

Once the proposal was put in by the borrower we executed it thoroughly. Our team of
experts arranges a suitable funding option for you and executes the process
effortlessly. Since then, Mr. Ajit has approached us for all his funding from us. If you
are looking for reliable and hassle-free funding solutions, Trekker Capital can be the
perfect place for you. We have expertise in the analysis of the market and offer the
cheapest ROI to borrowers. Factoring Funding is among the best solutions and
organizes every step of the way.
 Case study
ABC Aviation Inc., a fictional reseller of aviation parts, has focused on international
sales and was recently awarded contracts by companies in Guatemala and Peru. Two
of these contracts were small, totaling $250,000 in sales, and were due in one month.
The third contract, however, was valued at $500,000-a substantial amount for ABC
Aviation. The parts for this contract were due in two months. The following table
outlines the orders:

contract cogs Sale revenue Delivery date terms

1 $55000 $100000 Next month Net45
2 $82500 $150000 Next month Net45
3 $300000 $500000 2 month Net45

The company has $150,000 in the bank enough to cover the Cost of Goods Sold
(COGS) for the first two contracts, but not enough to cover the third contract. The
only way that ABC Aviation can fulfill these contracts is to use financing.

Working with the Export Import Bank:

Ex-Im Bank's export credit insurance was critical for the success of the transaction.
The company managed to get the foreign clients approved, which covered up to 90%
of the receivable face value in case of default. This. Coverage limited the risk to the
point that the transaction could be financed using factoring. However, the Ex-Im Bank
also has a program that covers up to 60% of the receivable face value if the goods are
rejected by the client. This added feature was essential in enabling the company to
purchase order (PO) financing as well.

Step 1:deliver contract 1 and 2

Before export factoring

Contract Cash bank A/R payroll General exp

2 $150000 $250000 $10000 $137000

Cash surplus $2500

Step 2: use export factoring on first two invoices

After export factoring

Contract Cash bank A/R reserve payroll General exp

2 $350000 $0 $50000 $10000 $137500
Cash $202500
surplus

Step 3 :deploy purchase order finance

Immediately after po fund

Contract Cash Po A/R reserve payroll General

bank funding exp
All 3 $350000 $100000 $500000 $50000 $10000 $437500
Cash $202500
surplus

Step 4 :factor the invoice for last contract

After export factoring

Contract Cash bank A/R reserve payroll General exp

All 3 $750000 $0 $150000 $10000 $437500
Cash $302500
surplus

What If a foreign client does not pay?

Account debtor default is an inherent risk in international transactions, where

collections can be difficult. However, this risk was greatly minimized by using the
Export-Import Bank's credit insurance program.