Now let us understand what is meant by Factoring.
Table of Contents
What is Factoring?
Types of Factoring:
- Recourse Factoring
- Non-recourse Factoring
Factoring services may be further categorised on the basis of the location of buyers and sellers.
Advantages of Factoring:
Although the Factoring services are offered by the Subsidiary of various banks, yet few banks itself offer the Factoring services. The advantages of factors are as follows.
1) Minimizes Liquidity Crunch:
The factors almost eliminate the liquidity crunch of the exporter or manufacturers (sellers of goods or services) and hence can focus to generate more sales.
2) Responds Immediately:
The factors don’t waste the time of the manufacturers, exporter or traders. They immediately respond within 24 hrs whether to accept the proposal of discounting a bill of exchange or not unlike banks.
3) Discounts bill of exchange:
Factors advance up to 80% of bill of exchange and rest 20% is remitted at the time of final recovery of bills from the debtors. The factors may charge their commission or interest upfront at the time of discounting or at the time of final settlement of bills which depend upon the norms of the Factoring institutions.
4)Maintain Ledger on supplier behalf:
The Factoring institutions also offer services like ledger maintenance on the behalf of sellers-firms.
5) Provide legal assistance:
The factors also provide legal assistance in case of any disputes arises at the time of recovery of bills.
6)Provide advisory services:
The factors provide advisory services related to buyers creditworthiness and other circumstances that helps sellers to take precautions while trading with the clients.
Factoring vs Forfaiting:
- Forfaiting services are always backed up by a letter of credit or Guarantee since there is the guarantee of both the banks of sellers and buyers. In other words, Forfaitors discount only those bill of exchange which is under the letter of credit or Guarantee.
- Forfaiting services in India are only offered by the EXIM Bank.
- Forfaiting offers the discounting of bills of exchange up to 100% and on the non-recourse basis as well.
Process of Factoring Service:
- The sales contract between sellers and buyers is the first step.
- Bill of exchange will be prepared and goods will be shipped.
- Before due date sellers approach to factors or Forfaitors
- Factors/ Forfaitor discount bill of exchange after deducting their upfront charges.
- On the due date, factors recover the invoice from the buyer and finally remit the remaining amount of sellers.
- If any dispute arises during the recovery of payment, factors further proceed legal action or return the invoice to the seller depending upon the services (recourse or non-recourse factoring) offered by factors.