OPERATING GUIDELINES FOR DOMESTIC FACTORING

FOR USE OF PRACTITIONERS

PREPARED FOR CONSULTATIVE COMMITTEE

OF BANGLADESH BANK

PREPARED BY

SOMNATH ROY, CONSULTANT

PRASANTA K. BANERJEE, CONSULTANT

SOUTH ASIA ENTERPRISE DEVELOPMENT FACILITY (SEDF)

 Terminologies

A Factor means the financing body which will offer factoring to its client.

A Client means seller or supplier of goods/services on credit.

A Debtor means the buyer who buys goods/services on credit.

Accounts Receivable/Book Debt means the trade debt arising from sale of
goods/services by seller to buyer on credit.

Open Account Trade means an arrangement in which the goods/services are

sold /supplied by seller to buyer on credit without raising any bill of exchange or
letter of credit.

Prepayment means advance payment made by the factor to the client (seller) up
to certain percentage of the invoice value (generally it varies from 75 to 85% of
invoice value).

Retention means margin maintained by the factor (invoice value minus

prepayment). The margin is kept to a) recover discounting & factoring charges
and b) maintain a cushion for any short payment by buyer on commercial ground
and/or recovery of any overdues in respect of other invoices. The retention
amount generally varies from 15 to 25%. After deducting its dues from the margin
the balance amount is refunded to the client (seller).

Purchase Order means a document or form used by a buyer to issue order for
goods/services.

Invoice means a legal debt instrument which indicates the amount due from a
buyer to pay for delivered goods/services.

Dilution means if the payment received from the debtor against an invoice is
less than the value of the invoice for any of the following reasons:

i) Discount agreed/levied by buyer for non compliance of trade terms by seller

ii) Rejection of goods/services
ii) Adjustment on account of two way trades

Non Recourse means a type of factoring where the factor assumes complete
responsibility for collection of debt. If the debt is not collected due to the financial
inability of the buyer (and not arising out of trade dispute), the factor assumes the
loss or recovers from credit insurer. Non recourse factoring can be offered when
credit insurance market is developed.

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Recourse means the right of the factor to recover its dues from the seller (client)
in case the buyer does not pay to factor due to trade dispute or its financial
inability.

Undisclosed factoring means where a factor discounts the invoice of a seller

without the knowledge of the buyer.

Discount Rate: the percentage rate of interest the factor charges on the pre-
payment amount. The discount rate should be based on cost of funds on one
hand and prevailing lending rate for competitive products (overdraft, etc) charged
by commercial banks/financial institutions on the other.

Factoring Charge: a price charged by the factor to the seller for providing
services for maintenance of sales ledger and collection of payment from the
buyer.

The factoring charge is generally 0.1% to 0.5% of the value of invoice factored.

Facility Set up Fee: this is a one time upfront fee charged by factor to seller to
set up the facility (processing charge for covering cost of outsourcing of audit, etc
and cost of maintaining liquidity for initial prepayment).This fee is optional and is
negotiable between factor and seller.

Face Value means the total value of an invoice.

Performance Risks means risks associated with compliances of terms and

conditions of a trade agreed between the buyer and the seller, such as,
Specifications / Performance standards of products/services, delivery period,
guarantees & warranties, etc.

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INTRODUCTION

Factoring is an alternate receivable financing instrument widely used in the

developed countries. Over the last decade, Factoring has been successfully
introduced in many developing countries including neighboring countries like, Sri
Lanka, Thailand and India. Factoring is ideally suited to finance receivables of
SMEs who generally suffer from shortage of working funds. Introduction of
factoring will therefore go a long way in overall development of the SME sector
and thereby the overall economy of the country.

This document has been prepared with a view to providing a framework of

operating guidelines for practitioners as also for the users of factoring facility,
particularly SMEs.

These guidelines are general in nature and each factoring organization need to
adopt it with or without modification as the case may be depending on their
specific work environment and work practices.

The guidelines have been organized into the following five sections:

1) Description of product “Factoring “and how it works

2) Policy Guidelines

2.1) Factoring Guidelines

2.2) Credit Assessment
2.3) Organization Structure & Segregation of Duties
2.4) Approval Authority
2.5) Internal Audit

3) Procedural Guidelines

3.1) Credit Evaluation

3.2) Approval Process
3.3) Credit Documentation
3.4) Credit Administration

4) Risk Analysis and Mitigation

5) Pricing Guidelines

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 1) DESCRIPTION OF PRODUCT “FACTORING “AND HOW IT WORKS

Factoring is a contract between a “Supplier” and a “Factor” wherein:

a) The supplier assigns its receivables to the factor

b) Notice of the assignment of receivables is given in writing to the
debtor(buyer)
c) The factor performs at least two of the following services:
i) Financing by way of prepayment against invoices
ii) Sales Ledger maintenance
iii) Collection of receivables
iv) Credit protection of bad debts against insurance, if available.

The factoring process comprises of:

a) Placement of order by buyer on seller

b) Seller approaches factor for approval of factoring facility
c) Factor approves the facility
d) Debtor confirms direct payment to factor against assigned invoices
subject to fulfillment of trade terms by seller
e) Seller dispatches goods to buyer
f) Seller assigns invoices in favor of factor
g) Seller informs buyer in writing of assignment of receivables
h) Factor disburses prepayment to seller
i) Buyer pays to factor on due date
j) Factor refunds balance to seller after recovering prepayment and
discount & factoring charges

A flow chart of factoring business is given in Appendix I.

A comparison of conventional Bill Discounting and Factoring is given below:

BILL DISCOUNTING FACTORING

Financing or receivables of Financing of client(seller)’s invoices on

client(borrower)against Bills of
Exchange or Letter of Credit
Lending against strength of balance
sheets
Credit Risk on Client ( Borrower).Client
repays the credit
Serviced by Consolidated Cash Flow
of Client (Borrower)
open Account Trade
Lending against strength of transaction
Performance risk on Client (Borrower)
and Credit/Payment risk on Debtor.
Repayment comes from debtor and not
client
Serviced by Invoice Backed Dedicated
Cash Flow from Debtor not Client

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Security / Collateral Driven
Only Finance
Limits Linked to Security/collateral
Cash Flow and Portfolio Driven
Finance and Value Added
Services(sales ledger management
and collection)
Limits Linked to Growth

As factoring is serviced by invoice backed dedicated cash flow as opposed to

consolidated cash flow of borrower as in the case of conventional lending, it is
inherently less risky from a credit point of view.

Factoring is somewhat similar to “Work Order financing “which is quite popular in

Bangladesh. The difference being that in Work Order Financing, the lender takes
performance risk on the entire business cycle of its client where as in factoring
the risk is restricted to post shipment performance only. Work Order Financing is
generally popular in construction contract and/or agency sales where as factoring
is possible in all trades.

Factoring is ideally suited in situation of open account sales involving continuing

relationship and in case whole turnover in respect of a buyer is assigned in favor
of factor. In factoring since small suppliers are financed, it can command better
pricing than direct lending for the same corporate (buyer) credit risk.

Reverse Factoring is a financial instrument in which the invoices of suppliers

duly accepted by the client (buyer) are factored. In case of reverse factoring the
client is the buyer as against the client being seller in case of normal factoring
and the factoring agreement is between the buyer and the factor. In case of
reverse factoring since funds are released to suppliers after the buyer (client)
duly accepts the invoices, the performance risks of the suppliers are obviated
and the only risk is the credit worthiness of the buyer.

A flow chart of reverse factoring business is given in Appendix II.

It is recommended that banks and financial institutions in Bangladesh should

start factoring with suppliers of their existing creditable clients as also reverse
factoring of the purchases of the same clients. Thereafter banks and financial
institutions should target the suppliers of other credit worthy organizations who
are not their existing clients.

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2) POLICY GUIDELINES

The policy guidelines suggested in this section covering all functional aspects of
factoring are outline general principles to manage factoring business. Each
factoring organization needs to formulate its own specific policy guidelines for
factoring business based on a variety of factors, such as , prevailing financial
market condition, regulations in force from time to time, competition, business
strategy, corporate culture & values, etc.
Specific policy guidelines should be approved by the Board of Directors of the
factoring organization.

2.1 Factoring Guidelines

The factoring guidelines should provide the key foundation for marketing /
relationship managers to formulate their marketing plan and should include the
following:

• Industry and Business Segment Focus

Based on prevailing business and industrial climate, the guidelines should clearly
identify the trade / industry / service sectors that should constitute the factoring
portfolio. The factors should establish specific trade / industry / service sectors
exposure caps to avoid over concentration in any industry/service sector and
thereby diversify risks. Based on sectoral exposure caps , the management
should issue clear instructions from time to time of factor’s appetite for growth or
otherwise( for example, Textiles : maintain, Services: grow , Construction: shrink,
etc ). The sectoral exposure caps should be reviewed and adjusted, if necessary
based on changing business climate at regular intervals.

• Single Client/Group Limits

Factor should establish single/group exposure limits based on prevailing

regulations, if any, and its own financials. Factors may wish to establish
conservative criteria based on its own assessment of its overall client profiles.

• Single / Group Sales Ledger Limits of debtors

Factor should establish single / group debtors exposure limits based on

assessment of each debtor. For this purpose the factor should design a debtor
scoring model.

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 • Discouraged Business Types

Factors should outline trades or services that are discouraged, such as,
perishable food items, software related services, business process outsourcing
(BPO), etc.
Further factoring should be discouraged for trades between group companies
and should be avoided when there is two way trade between parties.

• Factoring Facility Parameters

Facility parameters should be clearly stated. The parameters are:

i) Maximum outstanding amount (Fund-in-Use) in respect of single

client.
ii) Individual debtor sales ledger limit
iii) Debtor wise prepayment percentage
iv) Debtor wise invoice tenor (credit periods could vary from buyer to
buyer). It is suggested that tenor is decided on a realistic basis of actual
trade credit period
v) Debtor wise facility pricing – discount rate of prepayment, factoring
charge on invoice value
vi) Upfront one time set up fee for client
vii) Penal interest for delayed payment; this will not arise if non payment
by debtor on due date is adjusted against fresh invoices of the same
debtor or payments of other debtors whose invoices are also factored
viii) Covenants
IX) Security
X) Global limit on each buyer

2.2 Credit Assessment

The credit risk of a factoring business is distinctively different from that of

conventional lending. The credit risk of factoring comprises performance risk of
client (seller) and credit / payment risk of buyer as against credit risk of client in
case of lending. Thus in case of factoring the risk focus is on the transaction and
not on balance sheet of the client.
In light of above, credit assessment of factoring comprises of three parts:

i) Assessment of performance risk of client(seller)

ii) Assessment of financial health and payment record of debtor
iii) Assessment of trade reputation and financial health of client
(for eventual recourse, if required)

It is recommended that client (seller) should be encouraged to factor invoices of

more than one debtor as spread of debtors minimizes risk.

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The result of these assessments should be documented by the relationship
manager and thereafter scrutinized and vetted by the credit department.

2.3 Organization Structure & Segregation of Duties

Factoring business should ideally be set up in a separate corporate entity. It

could be a stand alone factoring company or a subsidiary or a Joint Venture of a
commercial bank or a financial institution.

In case under compulsion it has to be set up as a department of a bank or

financial institution, a separate demarcated organization should be set up for
factoring business to be successful. The need to set up separate organization
arises from the fact that the nature of risk in case of factoring is very different
from that in case of conventional lending and which in turn necessitates a
different mindset for the organization.
The following chart is a typical organization structure for factoring business

Chief Executive

Relationship/ Credit
Credit & Risk Internal
Marketing Administration
Management Audit
Management. Management

The responsibilities of the above functions are as follow:

Relationship/Marketing Management

• Market factoring as a product

• Maintain relationship with clients on an ongoing basis
• Communicate with client at each subrogation
• Keep abreast with industry / trade knowledge and current information of
business trends of client(seller) and debtor(buyer)
• Responsible for timely and accurate submission of factoring proposals and
annual reviews to credit department for scrutiny and independent
evaluation

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 • Give market feedback to Chief Executive and other departments
• Negotiates with the clients on facility parameters, such as pricing, debtor
limits, fund-in-use, etc.

Credit & Risk Management

• Independently scrutinize and vet the factoring proposals prepared by the

Relationship management..
• Recommend to the approval authority to approve or disapprove a proposal
• Oversight of factoring policies, procedures and controls relating to credit
risk.
• Oversight of quality of factoring portfolio.
• Periodical review of factoring portfolio.
• Advise the Chief Executive on need to review existing guidelines on credit
& risk management.

Credit Administration Management

• Ensure that facility documentation including specific covenants and

security are executed in compliance with terms & conditions of
approval and same is enforceable.
• Scrutinize each invoice in all respects to ensure validity of invoices.
• Authorize release of prepayment and ensure that aggregate
prepayment at any point of time is within the sales ledger limit of each
debtor and within the overall limit of the facility.
• Monitor repayment i.e., receipt of payment from debtors against
invoice on due date
• Follow up with client/debtor in case of delay in receipt of payment from
debtors
• Recommend recourse to client / enforcement of security for recovery
of bad debts
• Custodial duties
• Compliances

Factor should clearly segregate the above functions as suggested above. The
purpose of segregation is to improve knowledge levels and expertise in each
function on one hand and avoid conflict of interest and diffused accountability on
the other.

In case of stand alone factoring companies, in addition to the above business

functions, there would be support functions, namely, Resources and Treasury,
Human Resources, Information Technology and Legal.

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Resource and Treasury Department’s job will include mobilization of resources
on best terms, idle fund management, asset & liability management and advising
top management on cost of capital and product pricing.

Human Resources Department will focus on training of personnel,

organizational development and designing appropriate performance appraisal
and compensation systems.

Information Technology Department assumes great importance in factoring

business as factoring involves management and control of a large number of
invoices on a continuous basis. Successful operation of credit administration
function is highly dependent on having a robust IT platform. The department will
also be responsible for creation and maintenance of factor’s website.

Legal Department will work on design/ improvement of various documents, legal

notices, court cases and company law matters.

2.4) Approval Authority

The authority to approve factoring facility must be clearly delegated to Chief

Executive and /or any other senior executive and /or a Committee of Senior
Executives as may be deemed fit by the Board. All delegations must be recorded
in formal minutes of the Board Meetings. The degree of delegation will however
be a function of the size and geographical spread of the organization and could
therefore vary from one factor to another.
Marketing / Relationship management should not have any approval authority in
view of inherent conflict of interest.

2.5) Internal Audit

Internal audit is very crucial for factoring business more so because factoring
involves handling and tracking of large number of invoices. Internal audit will
conduct independent inspection of credit approval reports, facility and security
documents, random invoice scrutiny, release of prepayment, recovery, etc so as
to ensure compliances of policy guidelines, operating procedures, regulations,
etc. Internal Audit will report to the Chief Executive /Audit Committee of the
Board.

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3) PROCEDURAL GUIDELINES

This section covers the procedural aspects of management of different functions

of factoring business. The guidelines contained herein outline general practices
and would need to be adopted by each organization with suitable modifications,
where necessary depending on business environment, existing regulations,
availability and access to financial and trade information, etc.

3.1 Credit Evaluation

As mentioned earlier, credit risk of factoring business comprises of:

i) Performance risk of client (seller)

ii) Credit & payment risk of debtor (buyer)
iii) Credit risk of client (seller) in the eventuality of recourse

It is recommended that the factor could design an Application Form for its clients
which will enable the factor to capture in one shot all required information for
processing and thereby reduce the processing time. A specimen of factoring
facility “Application Form” is given in Appendix III

Performance Risk

For assessment of performance risk, the factor should conduct an audit/analysis

of past data of sales ledger of respective debtors. It involves tracking “invoice to
cash trail” of historical data available with client. Invoices selected at random
should be checked and the audit should highlight:

a) Years of relationship between buyer and seller

b) All instances of delayed payment , if any , extent of delays ( past due date)
and reasons for delay should be mentioned
c) In case of dilutions , the extent and reason for dilution should be
highlighted
d) Defaults of any nature are to be highlighted with complete details
e) Check whether there is two way trade between buyer and seller

Factoring is not recommended in respect of those debtors where there exist two
way trades with seller.

Besides audit of sales ledger, the factor should make independent trade
enquiries on the client and the debtor with their respective
suppliers/customers/dealers/distributors/trade bodies as appropriate.

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Based on above analysis, a Debt Collectibility Rating comprising debtor mix,
payment performance of debtors, length of relationship with debtors and level of
rejections/dilutions should be designed and adopted by each factor.

A specimen Debt Collectibility Rating Model is given in Appendix IV

Credit & Payment Risk of Debtors

Each debtor needs to be evaluated from a credit & payment risk perspective
based on following:
a) Industry Competency
• Quality of management & experience
• Competitive position in the market
• Types of industry

b) Transparency & References

c) Financial assessment
d) Debtor payment practice

For credit risk assessment of prospective debtors, factor should, as far as

possible, access credit information from Credit Information Bureau (CIB) of
Bangladesh Bank. It is recommended that Bangladesh Bank facilitates easy
access of information from CIB by authorized factors.

Obtaining above information on debtors is not an easy proposition. The factor

should therefore follow an investigative approach to assess the above attributes
to overcome the deficiency of limited available information.

Based on above assessment, a Debtor Rating Model may be designed and

adopted by each factor. A specimen of a Debtor Rating Model is given in
Appendix V.

It may be noted that the factor should also set a global exposure limit on each
debtor in respect of invoices raised and factored by various clients (suppliers).

Credit Risk of Client (Seller)

Credit risk assessment of the client(seller) is undertaken primarily to mitigate the

residual risk in case of non payment by debtor on account of trade disputes or
deterioration of financial health of debtor and consequent recourse of the facility
on the client(seller). The credit risk of the client (seller) is assessed on the same
basis as that of the debtor as stated above.

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In factoring the credit risk of debtor is far more important than that of client as the
primary responsibility of payment to factor lies with debtor.

It may be noted that recourse to client (seller) should happen only as a last
resort. Normally non payment in respect of any invoice should be adjusted
against margins in other invoices as also against future invoices. It is
recommended that the factor should always explore to have more than one
debtor to spread risk as also adjust non payment of one debtor against invoices
of another debtor. A suitable clause for assignment of whole turnover (debtor
specific) and set off of dues amongst various debtors would reduce incidence of
recourse.

Based on above evaluation, a credit approval / appraisal report is prepared.

3.2) Approval Process

After the approval report is prepared, it is independently scrutinized and vetted by

the Credit & Risk management department with particular reference to
authenticity of data, oversight of due diligence carried out, compliances of
guidelines, etc. Credit department should add its own independent comments
and recommendation to the approval authority to approve or disapprove a
proposal. The proposal is then put up to the approving authority for
consideration. The minutes of the decision of the approval authority should be
properly documented including all particulars of the facility and special terms &
conditions, if any. Based on the minutes, a facility approval letter is issued to the
client (seller).
All documents should be stored in a manner so that retrieval is easy. Legal
documents should be kept in safe custody.

A specimen of a factoring approval letter is given in Appendix VI.

3.3) Credit Documentation

Factoring documentation will comprise of:

• Accounts Receivable Management Agreement (factoring agreement) :

The agreement is similar to a loan agreement and would include the
names of the approved debtors and debtor wise details of facility
approved ( sales ledger limit , price , prepayment %, tenor, etc) and
overall fund-in use ( outstanding exposure limit on the client).

The agreement will also provide for clauses relating to assignment of

invoices, notification to debtors, undertakings and warranties,
obligations of client in case of disagreement with debtors, appropriation

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 of receipts, accounting procedures, penal interest , power of attorney ,
indemnity, events of defaults and remedies, etc.

• Debtor Introductory letter : a letter from the debtor addressed to the

factor acknowledging the client ( seller) as an authorized supplier and
agreeing to directly pay the factor on assignment of invoices on due
dates subject to fulfillment of trade terms by the supplier.

Tying the debtor for direct payment to factor could be also in the form
of legal undertaking on stamp paper from debtor to this effect or
against bills of exchange/ co-accepted bills/inland letters of credit as
may be negotiated between the buyer and the factor.

• Special Undertakings, if any

• Demand Promissory Notes

• Notarized Power of Attorney in favor of factor

• Post dated cheques. It could be for total facility or could be a set of

cheques based on debtors/invoices

• Personal guarantee(s) of proprietor / partners / principal directors of

the client(seller)

• Pledge/hypothecation /mortgage of assets , if collateral is stipulated by

the factor

A specimen of Notification of Assignment of invoices is given in Appendix VII.

The assignment of receivables should be registered with Registrar of Joint Stock

Companies, if feasible.

3.4) Credit Administration

After all documentation has been completed in all respects, the facility is ready
for utilization. The client will forward the assigned invoices, as and when they are
generated on dispatch of goods to the factor for prepayment. The notice of
assignment should bear the client’s stamp and should be signed by an
authorized signatory. The client would need to send copies of delivery challan
and VAT challan along with the invoices. The credit administration department
will scrutinize these documents for its accuracy of information and enforceability.
An indicative check list for scrutinizing an invoice is given in Appendix VIII.
Thereafter the prepayment will be made. It is recommended that the prepayment
cheque is drawn favoring the principal bank of the client as “XYZ Bank A/C

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Client”. The purpose of this is to keep the principal bank of the client aware of the
factoring facility being availed so that there is no double financing of the assigned
receivables.

As mentioned earlier, charging of Set up fee is optional and is negotiable

between the client and the factor. Set up fee is payable upfront on signing the
agreement and before commencement of prepayment. It could be received as
cash or debit to factoring account. Discount charges are levied at monthly
intervals, based on day to day outstanding drawn position while the factoring
charges are levied at the time of prepayment of each invoice.

Credit administration needs to keep track of each factored invoice for payment by
debtor on due date. A grace period of 15 to 21 days past due is given after
which it is recoursed against new invoices of same debtor or payment ( margin
portion) made by other debtors. Failing this, invoice based post dated cheque
collected from client at the time of prepayment may be enchased to recover
overdues. Overdues beyond the grace period would attract penal interest which
should be 2% over the document discount rate. Credit administration will
maintain debtor wise sales ledger of each client and sent monthly statement to
clients. In due course the client may be given online access to the sales ledger.

Credit Monitoring & Recovery processes and classification of factored assets

including provisioning for bad and doubtful debts/non performing assets will be
governed by the same regulatory guidelines as applicable to normal loans
(overdraft /bill discounting).

Sales Ledger Administration

The factor usually takes the responsibility to maintain the sales ledger of the
clients in respect of debtors whose invoices are factored. The major
responsibilities in this regard are as follow:

• Maintain sales ledger in a proper manner updated online with latest

invoices, prepayments and cash received.

• Persistent efforts are made to collect dues on due dates through personal
contacts, letters of reminders, telephone messages, etc.

• Ensure monthly statements are sent to clients.

• Remit or give credit to client account in respect of retention amounts after

collection of dues.

• Maintain close liaison with client and debtors to resolve various trade
disputes that could arise from time to time.

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 • Keep unallocated credits to a minimum.

• Review sticky accounts regularly and follow up action.

• Submit MIS report to management on details of overdues, cheques

returned, unallocated cash receipts, inactive clients/buyers, disputes, legal
cases, etc.

A robust IT platform is an essential pre requisite to administer, monitor and

recovery of credit. As for SMEs, the invoices size by value will be generally small,
factoring business entail processing and tracking of large numbers of invoices
and hence the importance of IT platform.

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4) Risk Analysis and Mitigation

As mentioned earlier, factoring business involves two primary risks –

performance risk of seller (client) and credit & payment risk of debtor. The
residual risk, on recourse, hinges on creditworthiness of the seller (client).
Analysis and evaluation of these risks are covered in section 3.1.

The other generic risks include defective/false/fake invoices, direct

payment by buyer to seller in spite of assignment of receivables and seller
not routing all invoices through the factor.

Risk mitigation methodology will include:

1) Proper evaluation of invoice to cash trail of
sales ledger
2) Evaluation of financial statements of buyer
3) Trade inquiries
4) Appropriate & enforceable
documentation( factoring agreement, demand
promissory note, directors personal
guarantees, power of attorney , post dated
cheques, etc)
5) Special conditions , such as , whole turnover
clause, set off clause amongst debtors , etc
6) Proper scrutiny of invoices
7) Effective online credit monitoring
8) Legal actions

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 5) Pricing Guidelines

Pricing for factoring facility is generally structured in two parts:

a) Return on fund employed -- discount charge

b) Charge for services provided – factoring charge

The discount charge is fixed on the basis of cost of funds, pricing of competitive
products (overdraft, etc) and merit of each proposal.

The factoring charge is based on number of services provided (such as,

collection, sales ledger maintenance, credit protection, etc) and is usually a small
percentage (0.1 to 0.5%) of invoice value subject to a minimum amount per
invoice.

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Appendix I

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21
 Appendix III

APPLICATION FOR FACTORING FACILITY

The Manager
Name of the factoring Company
Address

Dear Sir,

We will request you to kindly approve us aggregate factoring facility of …. Million

Taka for financing sale of (name of product/service) to our buyer(s) as per details
given below:
A. Applicant Company Information

Name of
Company

Please tick the appropriate *please

specify
Type  Proprietorship  Partnership  Pvt Ltd  Public Ltd  Others*
Listed Yes /No Current Market
Price
License / If Listed
Registration No

Registered office Main office Factory

Address Address Address

Contact Person Contact Person Contact Person

Phone: Phone: Phone:

Fax: Fax: Fax:
Email : Email : Email :
B. Business Information

Type of Business
 Processing  Manufacturing  Trading  Services
Nature of Business / Products / Services

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Key Shareholder Information
Name Designation Shareholding% age Shareholding Amount

Associate Company Information

(Including Parent or Subsidiary)
Name & Address of the Associate Year Gross Pre-Tax Profit
Turnover ((last audited)
(last audited)

Existing Fund Based Facilities

Taka'000s
Name & Address of Sanctioned Current Collateral offered.
the Lending Limit Outstanding
Institution/Bank*

* Please give Name and Address of your Principal Bank

Financial Performance
Taka'000s
Parameter Previous Year Current Year Next Year
Audited/ (estimated) (projected)
Unaudited
Total Sales
Operating expenses
Interest
Depreciation
Profit After Tax
Bad Debts
Net Worth

Declaration
We declare that the above information is correct to the best of our knowledge and we have not wilfully withheld
any material information, adverse or otherwise, that may influence your decision.

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Authorized Signature & Stamp
Name
______________________
Designation
______________________
Date & Place
______________________

Please provide the following documents

 Last 3 years audited/ unaudited Annual Accounts

 Latest Half Yearly Reports, if available

 Current Year Estimates

 Company Profile & Sales Brochures

 Articles and Memorandum of Association /Partnership Deed

 Bank Statements for last 12 months

 Sales Ledger of each buyer (whose invoices are to be factored) for 12

months.

 Names and specimen signatures of authorized signatories.

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 Details of Buyers
To be filled in separately for each buyer

BUYER’S DETAILS
Name & Address Contact Person & Designation

Years Of Relationship with buyer Registration No./ Tel :

VAT No.
Fax :
Products Sold to Sales Previous Year Sales Current Sales Next Year Projected
Buyer Quantity & Value Year Estimated Quantity & Value
Quantity & Value

Payments Terms No. of Invoices / Avg. Value Of Limit Required

Month Invoice

Name & Address of Buyer’s Bank Bank’s Tel / Fax

N.B. Please note that in order for the factoring company to consider this
proposal, it is essential that the factoring company gets financial
information on the buyers to assess their credit worthiness. This
information may be available as published information in public domain or
obtained from Credit Information Bureau of Bangladesh Bank or other
sources.
In case this information is not available in respect of specific buyer(s), the
factoring organization may not be able to consider the factoring facility in
respect of those buyer(s).

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 Appendix IV

Specimen Debt Collectivity Rating Model

Period of Relationship

Period 6-12 12-18 18-24 2-3 years Above 3

months months months years
Rating 5 4 3 2 1

Invoice to Cash Trail Tested for Last Twelve Months (In Percentage)

% of Invoices Above 80 80-70% 70- 50 % 50- 25% Below

Checked % 25%
Rating 1 2 3 4 5

Note: Scoring for invoice to cash trail tested will not be considered for rating; it is
for information only. It is left to the judgment of the appraising officer to carry out
the number of test based on his assessment of client/debtor.

Dilution Level /Two ways Trade for Last Twelve months

% Dilution Less than 5-10% 10- 15 % 15 -20% Above 20

5% %
Rating 1 2 3 4 5

Aging of Debt (% of debt outstanding for more than 30 days past due date)
For Last Twelve months
% overdues Less than 5-10% 10- 15 % 15 -25% Above 25
5% %
Rating 1 2 3 4 5

Account Criticality (sales to a specific debtor as % of total sales of client)

% sales to Less than 20 -40% 40 to 60% 160-80 % Above 80

total sales 20% %
Rating 5 4 3 2 1

Suitable weightage needs to be assigned to each of these above 4 ratings

(excluding the rating on invoice to cash trail tested) and based on that an overall
Debt Collectivity Rating is arrived at.

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For example

Item of Rating Rating Assigned Weightage

Period of Relationship 3 30%

Dilution Level 2 30%

Aging of Debt 2 30%

Account Criticality 4 10%

The Overall Rating, on this basis works out to 2.5 (0.3 x 3 + 0.3 x 2 + 0.3 x 2 +
0.1 x 4). The Overall Rating Scale will range from 1 to 5 and can be classified as
follows:

1 to 2 Superior

2 to 3 Satisfactory

3 to 4 Acceptable (needs close monitoring)

4 to 5 Not Acceptable

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 Appendix V

Specimen Debtor Rating Model

Particulars Weightage
Sl. No.
1. Industry Competency 20%
• Management & Experience
• Competitive Position in Market
• Types of Industry ( Growing ,
Matured and Stagnating )

2. Transparency & References 15%

3. Financial Assessment 50%

4. Debtors Payment Practice 15%

Total 100%

Score 90 % and 75- 90% 60-75% 45-60% Below 45%

Above
Rating A+ A B C D

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 Appendix VI

Model Approval Letter

Date
Client Name
Address

Dear Sir(s)
Kind Attention; Mr. ---------

This has reference to your application for factoring facility. We are pleased to inform you
that our bank / FI have approved factoring facility to your company on the following
terms & conditions:

Maximum funds in use (outstanding) limit; Taka ……

Facility set up fee (Optional): Taka ……

Approved customers (Debtors)

Customer Sales Maximum Prepayment % Discount Charge (%)

Name Ledger Tenor
Limit ( (Days)
In Taka)
ABC Ltd 20,00,000 60 75 14
XYZ Ltd 30,00,000 90 80 13
MNO Ltd. 15,00,000 180 70 15

Discount Charges:

Payable on the prepayment outstanding calculated on a daily balance method and

levied on the last working day of the calendar month.
We reserve the right to re-price the discount rates as mentioned above should there be
any upward movement in the interest rates in the market.

Factoring Charge:

0.1 % of the gross invoice value subject to a minimum of Taka 75.

Documentation:

• Accounts Receivable Agreement

• Personal Guarantee of proprietor / partners / principal directors
• Demand Promissory Note
• Debtor introductory letter(s)
• Power of attorney in favor of us
• Post dated cheques

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 • Any other tangible security, if stipulated

You are requested to keep your charge holding working capital banker , if any,
advised about our facility and on our part, we will make all our prepayments to your
charge holding bank A/C yourselves.

Kindly return the enclosed duplicate copy of this letter duly signed by your authorized
signatories as a token your acceptance of the offer. This offers remains valid for
acceptance for 30 days from the date of receipt of the offer.

We look forward to a mutually beneficial relationship with you.

Thanking you

For (Name of the Factor)

Authorized signatory

Accepted

For (Name of Client)

Authorized Signatory

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 Appendix VII

Specimen of Notification of Assignment of Invoices

Date
Name of Factor
Address

Notification & Transfer of Receivables

Seller’s Name: ABC Ltd.

Invoices:

Debtors Invoice Invoice Payment Due Invoice

’ Name Number Date Terms Date Amount
MNO 750 30/08/04 120 Days 29/12/04 TK.----
Ltd

The attached copies of the invoices represent transactions entered by the

seller with the seller’s debtors as listed above.

 We have not availed any pre-shipment loan against above invoice (s).

 We have availed of pre-shipment loan from (name of bank /

FI) and our account number is-----. Kindly make payment of the available funds to
our aforesaid account of the above bank to crystallize the pre shipment Loan.

For Seller’s Use For Factor’s Use

Pursuant to the agreement between we the seller and
( name of factor ), the seller hereby notifies the factor of
the transactions and confirms the factor shall be entitled
to all rights , titles and interest in and to all debts as
specified on the copies of invoices attached including
the rights to collect all the said debts
Received
For (name of seller)
Signature, Date and
Signature of Authorized official Stamp of Factor
Date with Stamp

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 Appendix VIII

Indicative Checklist for Verifying Invoices

i. Does the invoice relate to an approved buyer?

ii. Check the arithmetical accuracy of invoice amount.

iii. Has the invoice been signed by an authorized signatory.

iv. Is the invoice amount within the sales ledger limit?

v. Has the invoice been assigned in favor of factor by way of

assignment seal / assignment clause?

vi. Are the following documents attached to the invoice

a. Copy of VAT challan

b. Copy of delivery challan

c. Blank dated cheque for the value of invoice

7. All alternation in the invoice should be initialed by the

Authorized signatory.

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