What is factoring?

Factoring is an ongoing arrangement between the

client and the factor, where the sales of goods and
services are made on open account terms and the
invoices for the same are assigned to the factor
regularly for the purpose of funding, collection and
sales ledger administration.
Factoring involves a long-term relationship between
the buyer and the seller with the whole turnover
being assigned to the factoring company.

Origin
Came into existance in the year 1920
It was not an organised sector that time
Association of British Factors(ABF) came in 1976
Nearly 90% of global factoring turnover comes from
USA & Europian countries
RBI appointed the C.S.Kalyanasundaram Committee
(1988)
It suggested to start factoring by a bank through its
subsidiary

As of today,
Worldwide,

factoring volume is more than

USD 700 billion a year
Spread over nearly 60 countries and
covering more than 1,00,000 businesses.
Particularly in developed countries, factoring
is an accepted way of conducting business.

Why use Factoring?

Through the use of Factoring receivables are

instantly converted into cash leading to improved
cash flows that can help funding of future growth.
It facilitate an efficient follow up of payments from
buyers, which is made possible through
relationships developed by factors with clients
buyers.
Factoring provides credit protection for export
sales which enables to do business with buyers
who are unwilling to open Letters of Credit.
Factoring also provides other peripheral services
such as advisory services, credit assessment, etc.

What are the types of factoring

arrangement?
There

are basically two types of Factoring

arrangements:
1) Domestic Factoring- If you are selling in
India.
2) International Export Factoring- If you are
exporting form India.

Domestic Factoring
The

factoring arrangement where all the

three- the factor, the seller and the buyer are
in the same country, subject to the same
laws.

International Factoring
The

factoring arrangement, where the seller

and the buyer are in two different countries
involving co-operation between two factoring
companies, one in the sellers country
(Export Factor) and the other in the buyers
country (Import Factor)

Major Types of Factoring

Non-Recourse Factoring - It is the most
comprehensive type of factoring arrangement
offering all types of services namely:
Finance
Sales Ledger Administration
Collection
Debt Protection
Advisory Services
It gives protection against bad debts to the client.
In other words, in case the customer fails to pay,
the factor will have no recourse to the client and
will have to absorb the bad debts himself.

Recourse Factoring
In

this type of factoring arrangement, the

factor provides all types of facilities except
debt protection. In other words, the client is
responsible for any bad debts incurred.

Invoice Discounting
In

this type of factoring arrangement, only

finance is provided and no other service is
offered.

Undisclosed Factoring Or Open

Account Receivables
The

factor does not follow up or collect

payment from the customer. The customer
may not be aware of the factoring
arrangement and pays the client directly. The
factor receives payment of invoices through
the client.

Factoring Charges
Finance

Charge - It represents the interest

on funds made available to the client by way
of prepayment against purchase of approved
invoices.
Service Charge - The charge levied for
rendering non-funding services such as
collection, sales ledger maintenance and
other advisory services.

How much advance can Client get?

Advances

are made as a percentage of

invoice value based on criteria, such as,
quality of receivables, number and quality of
the buyers and clients requirements.
Typically 80 % of invoice value is advanced.

Advantages (to the client)

Immediate

conversion of cash sale

Competitive credit terms
Accelerate the production cycle
Free from tensions
Efficient W.Cap. Management
Assessing quality of debtors
Expansion of business

Advantages

To

the Buyers
Adequate credit facilities
Getting periodical statement from the factor
No affect on quality of goods, contractual
obligations etc.

Benefits of International Factoring

To

To

the Exporter
Deals with only one factor
He gets specialised knoweledge
Risk of B/D are reduced

the Importer
Pays the invoice in the same country
Gets better credit terms

Factoring is not suitable under following

cases a) where large volume of cash sales take place.
b) engaged in speculative business.
c) selling highly specialized capital equipments or
made-to-order goods.
d) where credit period offered to the buyers is
more than 180 days.
e) where there is Consignment Sale or 'Sale or
Return Arrangements'.
f) where sales are to the sister / associated
companies .
g) where sales are to the public at large, etc.

FCI (Factors Chain International)

FCI is a global network of leading factoring countries
It helps its members achieving competitive advantage
through:
A global network
Modern & effective communication system
Reliable legal framework
Standard procedures
Universal quality
World wide promotion
Training programmes

Factoring Profile(India)
Number

of factoring companies 08
From Domestic factoring turnover 1450
(million euros)
From International factoring turnover - 175
(million euros)
From Total factoring turnover - 1625 (million
euros)

Large number of industries

Covered

under factoring, including

automobiles, pharmaceuticals, textile,
garment and engineering.
In addition to the manufacturing sector, the
services sector industries, such as, traveling,
telecommunications, software services and
so on are also suitable for factoring.

FCI Members

Can Bank Factors Ltd. - Bangalore www.canbankfactors.com

City Bank Mumbai
ECGC of India Ltd.- Mumbai
Foremost Factors Ltd.- New Delhi www.foremostfactors.net
Global Trade Finance Ltd.- Mumbai www.gtfindia.com
SBI Factors & Commercial Services Pvt.Ltd Mumbai
www.sbifactors.com
The HSBC Ltd. - Mumbai www.hsbc.co.in