Finance is that branch of economics that deals with management of money and assets involving
banking, investments, credits, and so on. As a verb, let's look at the activities that happen around
us. One needs a proper planning, or estimation in a business management, like arranging fund,
assessing the profit/loss factor, etc. In the personal front arranging ones' finance may be his or
her saving ability or investments in various instruments available.
A nation needs to have a budget to run the economy, have to plan accordingly regarding the
general welfares based on the revenue generated from the tax-payers, or foreign exchanges
earned over a period. Whether it's private, public, or personal front, the common mantra here is
proper planning, understanding of income and expenditure, and risk-factors [Link],
where do we find these entire activities taking place, or in common man's term where's the
market place? Its everywhere around us, but happens in a very organized fashion, so we will call
them in different names, like Stock (equity) markets, Forex market, etc.
I told you about the Bulls and Bears, yes they roam around freely at the Stock markets, but don't
worry, they are simply the market jargons that represent the stock-market confidence, actually
the share price indices. Stock market is the place where trading of company stocks are done. This
is a regulatory body where the company stocks and derivatives are listed and facilitates buying
and selling. Now you know that NASDAQ, NYSE, and the London Stock Exchange are the
likely places you can findbulls and bears apart from the zoological garden!
The Foreign Exchange or the Forex market is regarded to be the largest financial market place
based on the volume of transaction every day. It involves regulatory banking bodies,
government, MNCs, and other financial institutions. Finance market place is basically the
exchange or trading place for one currency with other. There isn't' any particular institutional
body where this trading happens, but usually an Over-the-Counter practice, where different
currency instruments are exchanged. Even the rate varies from place to place, that is why you
will find different values for one dollar in other countries.
Factoring And Forfaiting Services In India: An Appraisal
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Suggested websites
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Books on Forfaiting
Ref : Mezra / London Forfaiting
Forfaiting for Exporters by Andy Ripley : [Link]
Forfaiting (1986) by Ian Guild
EXIM Bank of India Booklet
Indian Institute of Bankers, Mumbai Booklet
NIBM, Vinimaya
ICFAI – Chartered Financial Analyst
Why we need Factoring?
For Smooth cash flow
For meeting working capital needs
Overcome the situation from high cost of capital and reduced profit
Factoring Services - Concept
Definition:
Factoring is defined as ‘a continuing legal relationship between a financial institution (the
factor) and a business concern (the client), selling goods or providing services to trade
customers (the customers) on open account basis whereby the Factor purchases the
client’s book debts (accounts receivables) either with or without recourse to the client and
in relation thereto controls the credit extended to customers and administers the sales
ledgers’.
Factoring functions..
It is purchasing & collection the client’s a/c’s receivables (with or without recourse),
Sales Ledger management
Credit investigation & undertaking of risks
Provision of finance against debts
Rendering consultancy services
Factoring Services - Concept Client Customer Factor Order placed Deliver of goods Client
submits invoice Factor-Prepayment Monthly statements Customer pays
Funding Process
Fax the copy of invoice to factor
Factor processes the invoice
Get up to 80% of the invoice in 24 hours
20% kept in reserve account
Factor receives the payment from customer
Factor deducts fee from reserve account
Factor forwards the balance from reserve
Types of Factoring Services
Full Service factoring or w/o recourse factoring
o Standard Factoring
o Factor Assumes Credit Risk
With Recourse Factoring
o Factor does not assume credit risk
o If debtors not paid, clients have to take the work for collection
Maturity Factoring
o Collection Factoring
o Paid to clients only when factor gets money
Bulk Factoring
o Disclosed Factoring
o Provides Finance after disclosing the fact of assignments
Invoice Factoring
o Only provides finance against invoices
o All other works have to be done by clients
Agency Factoring
o Factor and Client share the work
o The Factor has to provide finance and assume risk
International Factoring
o Done with exporters
o Facilitated with the help of export factor and import factor
Two-Factor System of Factoring
There are usually four parties to a cross-border factoring transactions
o Exporter (client)
o Importer (customer)
o Export Factor
o Import Factor
Two factor system results in two separate but inter-linked agreements
o Between exporter and export factor
o Between export factor import factor
Two-Factor System of Factoring
Functions of factors are divided between export factor and import factor
Import factor provides a link between export factor and the importer and serves to solve
the international barriers like language problem, legal formalities and so on. He also
underwrites customer trade credit risks, collects receivables and transfers funds to the
export factor in the currency of the invoice
Exporter Importer Country A Country B Export Factor Import Factor Goods and invoices –
Stage I Copy Invoice Stage II Prepayments Stage III Copy Invoices Stage IV Statements Stage V
Payments Stage VI Payments Stage VII Payment of Commission Stage VIII
Benefits Of Factoring
Financial Services
Collection Service
‘ Credit Risk’ Service
Provision of expertise ‘sales ledger management’ service
Consultancy service
Economy in Servicing
Off-balance sheet financing
Trade Benefits
Miscellaneous service
What is Forfaiting ?
“ Forfait” is derived from French word “a forfait” which means forfeiting or surrender of
rights
It is a mechanism of financing exports
o by discounting export receivables
o evidenced by Bills of Exchange or Promissory Notes
o without recourse to the seller (viz exporter)
o carrying medium to long term maturities
o on a fixed rate basis (discount)
o upto 100 per cent of the contract value
Forfaiting..
It is a highly flexible technique that allows an Exporter to grant attractive credit terms to
foreign Buyers, without tying up cash flow or assuming the risks of possible late payment
or default. Simultaneously, the Exporter is fully protected against interest and/or currency
rates moving unfavourably during the credit period Forfaiting is a highly effective sales
tool, which simultaneously improves cash-flow and eliminates risk.
Six Parties in Forfaiting
Exporter (India)
Importer (Abroad)
Exporter’s Bank (India)
Importer’s/ Avalising Bank (Abroad)
EXIM Bank (India )
Forfaiter (Abroad)
Forfaiting : 8 Steps
Commercial contract : Exporter & Foreign Buyer
Commitment to Forfait BE , Pro Notes
Delivery of Goods by Exporter to Buyer
Delivery of BE / PN to Bank to EXIM Bk
Endorsement of BE / PN without recourse
Cash Payment/ thro’ a Nostro Account
Presentation of BE / PN to Buyer on maty
Payment of Debt Instrument on maturity
Benefits to Exporters
Converts a Deferred Payment export into a cash transaction, improves liquidity
Frees Exporter from cross-border political or commercial risks associated
Finances upto 100 percent of export value
It is a “ Without Recourse ” finance
Hedges against Interest and Exchange Risks
Benefits to the importer
The Importer can match repayments to projected revenues, allowing for grace periods.
The Importer can obtain 100% financing, and avoid paying out cash in advance.
The Importer can pay interest on a fixed rate basis for the life of the credit, which will
make budgeting simpler and safer.
The Importer can access medium to long term financing which may be prohibitively
expensive or completely unavailable locally.
The Importer may be able to take advantage of export subsidy schemes which are often
available from the Exporter's government.
Drawbacks of forfaiting
Non-availability for short Periods
Non-availability for financially weak countries
Dominance of western currencies
Difficulty in procuring international bank’s guarantee
DIFFERENCE BETWEEN FACTORING AND FORFAITING
[Link] for ongoing open account sales, not backed by LC or accepted bills or
exchange.
2. Usually provides financing for short-term credit period of upto 180 days.
1. Oriented towards single transactions backed by LC or bank guarantee.
2. Financing is usually for medium to long-term credit periods from 180 days upto 7
years though shorterm credit of 30–180 days is also available for large transactions.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
[Link] a continuous arrangements between factor and client, whereby all sales are
routed through the factor.
4. Factor assumes responsibility for collection, helps client to reduce his own overheads.
3. Seller need not route or commit other business to the forfaiter. Deals are concluded
transaction-wise.
4. Forfaiter’s responsibility extends to collection of forfeited debt only. Existing
financing lines remains unaffected.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
5. Separate charges are applied for
— financing
— collection
— administration
— credit protection and
— provision of information.
5. Single discount charges is applied which depend on
— guaranteeing bank and country risk,
— credit period involved and
— currency of debt.
Only additional charges is commitment fee, if firm commitment is required prior to draw
down during delivery period.
DIFFERENCE BETWEEN FACTORING AND FORFAITING
6. Service is available for domestic and export receivables.
7. Financing can be with or without recourse; the credit protection collection and
administration services may also be provided without financing.
6. Usually available for export receivables only denominated in any freely convertible
currency.
7. It is always ‘without recourse’ and essentially a financing product.
Imp
Accounts Receivable Factoring Glossary
A R Factoring or AR Factoring: Abbreviation of Accounts Receivable Factoring
Account Receivable: A series of accounting transactions dealing with the billing of customers who owe
money to a person, company or organization for goods and services that have been provided to the
customer.
Account Receivables: Plural of Accounts Receivable
Accounts Receivable Collections: The process of collecting Accounts Receivables
Accounts Receivable Factoring: The act of selling your Invoices to a Factoring Company, discounted, and
based on the risk factor assigned to the portfolio of Receivables. The amount of value assigned to the
account depends on the age of a receivable. In its strictest sense this type of Factoring is Non-Recourse.
Accounts Receivable Financing: Often this term is interchanged with Accounts Receivable Factoring.
This is often a Recourse type arrangement.
Accounts Receivable Funding: Synonymous with Accounts Receivable Financing.
Accounts Receivable Software: Application software which records and processes accounting
transactions within functional modules such as accounts payable, accounts receivable, payroll, and trial
balance.
AR & Export Factoring: This is the sale of your short-term foreign accounts receivable at a discount to a
Domestic based export factor company for immediate cash. The Domestic Factor partners with a
selected Overseas Factor company operating in your target market to assume the full credit risk of your
overseas buyers.
Business Financing: Any kind of lending secured by a Business.
Business Loan: Any kind of lending secured by a Business.
Business Loans: Plural of Business Loan
Cashflow or Cash Flow: A measure of a company's financial health. Equals cash receipts minus cash
payments over a given period of time; or equivalently, net profit plus amounts charged off for
depreciation, depletion, and amortization.
Commercial Factoring: Synonymous with Accounts Receivable Factoring.
Commercial Line of Credit: Businesses financing to get a loan for a company without having to worry
specifically how they will spend the cash.
Credit Financial Services: Services provided by the finance industry.
Discounting Factoring: Synonymous with Accounts Receivable Factoring.
Factor: Synonymous with Factoring Company.
Factoring: A financial transaction whereby a business sells its Accounts Receivable (i.e., Invoices) at a
discount.
Factoring Accounts: Synonymous with Accounts Receivable Financing.
Factoring Business: Synonymous with Factoring Company
Factoring Companies: Plural form of Factoring Company.
Factoring Company: A financial institution which purchases Accounts Receivable (i.e., Invoices) at a
discount from businesses.
Factoring Loan: Synonymous with Accounts Receivable Financing.
Factoring Loans: Plural form of Factoring Loan.
Factoring Receivables: Synonymous with Accounts Receivable Financing.
Factors: Plural form of Factor.
Financial Services Company: Refers to the Company that provides finance services to the general public,
commercial and institutional entities.
Invoice Discounting: Synonymous with Factoring Company
Invoice Factoring: Synonymous with Factoring Company
Invoice Factoring: Synonymous with Factoring Company
Invoice Factoring Company: Synonymous with Factoring Company
Invoice Finance: Synonymous with Accounts Receivable Financing.
Non-Recourse Factoring: A Factoring facility that is credit insured and if the company that is responsible
for the invoice does not pay it, the Finance Company will not go after the issuers of the Invoice.
Receivable: A debt owed, usually to a business, from the perspective of that business; Especially, a debt
arising from a sale on account or on credit; capable of being received, especially of a debt, from the
perspective of the creditor
Receivable Factoring: Synonymous with Factoring Company
Receivable Financing: Synonymous with Accounts Receivable Financing.
Receivables: Plural form or Receivable.
Receivables Financing: Synonymous with Accounts Receivable Financing.
Recourse Factoring: A Factoring facility that is NOT credit insured and if the company that is responsible
for the invoice does not pay it, the Finance Company will go after issuers of the Invoice.
Small Business Factoring: Synonymous with Factoring Company
Small Business Financing: Synonymous with Small Business Loan.
Small Business Loan: Any kind of lending secured by a Business.
Small Business Loans: Plural of Small Business Loan.
