credit factoring and fofaiting

8/11/2019 Credit Factoring and Fofaiting

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Group 7

Credit Factoring And Forfaiting


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WHAT IS FACTORING ?

Factoring is the Sale of Book Debts by a firm (Client) to

a financial institution(Factor) on the understanding that

the Factor will pay for the Book Debts asand when they

are collected or on a guaranteed payment date.

Normally, the Factor makes a part payment (usually upto

80%) immediately after the debts are purchasedthereby providing immediate liquidity to the Client.


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PROCESS OF FACTORING

CLIENTCUSTOMER

FACTOR


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So, a Factor is,

a) A Financial Intermediary

b) That buys invoices of a manufacturer or a trader, at a discount,and

c) Takes responsibility for collection of payments.

The parties involved in the factoring transaction are:-

a) Supplier or Seller (Client)

b) Buyer or Debtor (Customer)

c) Financial Intermediary (Factor)


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SERVICES OFFERED BY A FACTOR

Follow-up and collection of Receivables from Clients.Purchaseof Receivables with or without recourse.

In a recourse agreement the exporter has to repurchase or pay

for any invoices the factor cannot collect from the exporter'scustomers.

Help in getting information and credit line on customers (creditprotection) Sorting out disputes, if any, due to his relationshipwith Buyer & Seller.

For instance in retailing, the credit card business is a clearexample of factoring.


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PROCESS INVOLVED IN FACTORING

Client concludes a credit sale with a customer.

Client sells the customers account to the Factor and notifies the

customer.

Factor makes part payment (advance) against account purchased,

after adjusting for commission and interest on the advance.

Factor maintains the customers account and follows up for

payment.

Customer remits the amount due to the Factor.

Factor makes the final payment to the Client when the account is

collected or on the guaranteed payment date.


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Advantages Firms resorting to factoring also have the added attraction of

ready source of short-term funds.

This form of finance improves the cash flow and is invaluable as it

leads to a higher level of activity resulting in increased

profitability.

By offloading the sales accounting and administration, the

management has more time for planning, running and

improving the business, and exploiting opportunities.

The reduction in overheads brought about by the factorsadministration of the sales ledger and the improved cash flows

becauseof the quicker payments by the customers result in

interest savings and contribute towards cost savings.


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Disadvantages

Factoring could prove to be costlier to in-house managementof receivables, specially for large firms which have access tosimilar sources of funds as the factors themselves and whichon account of their size have well organised credit andreceivable management.

Factoring is perceived as an expensive form of financing andalso as finance of the last resort. This tends to have a

deleterious effect on the creditworthiness of the company inthe market.


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FORFAITING

Forfaiting is the term generally used to denote the purchase ofobligations falling due at some future date, arising from deliveries ofgoods and services - mostly export transactions - without recourse to

any previous holder of the obligation.

Forfaiting is the term generally used to denote the purchase ofobligations falling due at some future date, arising from deliveries ofgoods and services - mostly export transactions - without recourse to

any previous holder of the obligation.


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Historical Development of Forfaiting

The origins of the forfaiting market lie in changes in the worldeconomic structure during

The early sixties, when trade between Western and EasternEurope was re-established.

The growing importance of trade with developing countries in

Africa, Asia and Latin America boosted the forfaiting market to aninternational level.


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Advantages of Forfaiting

100 % Risk Cover

Country Risk (Political & Transfer Risk)

Currency RiskCommercial Risk

Interest Rate Risk

Instant Cash Flexibility and Simplicity


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General Aspects of Forfaiting

Repayments / Amounts

Currency

Discounting Type of Instrument

Promissory Note / Bill of Exchange

Without Recourse Clause

Effective / Net of Deduction ClauseBook Receivables / Letters of Credit


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BENEFITS TO EXPORTER FROM

FORFAITING

Converts deferred payment into cash transaction, improvesliquidity and cash flow

Frees Exporter from cross-border political or commercial risk

Finance upto 100 % of Value

Being without recourse to drawer, it does not impact exportersborrowing limits. It is an additional source of finance.

Provides fixed rate finance, hedges against exchange andinterest risk

Frees exporter from credit administration and collection problems.

Exporter saves on insurance cost since forfaiting obviates needfor export credit insurance

Exporter can consider exporting to countries which are risky


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MECHANICS OF FORFAITING

EXPORTER IMPORTER

FORFAITER AVALLING BANK

HELD TILL MATURITY

SELL TO GROUPS OF INVESTORS

TRADE IN SECONDARY MARKET


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Why do we need Factoring and Forfaiting

Conventional financing methods like bank loans, equity financing

etc. come with a lot of conditions and strings attached which new

or small exporters find difficult to meet.

For instance new firms may find it difficult to raise bank loans

(since there is no proof that business will be viable, no balance

sheets to show healthy profits). Equity participation implies a

more long-term commitment and accountability towards theshareholders.


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Factoring and Forfaiting

Both provide immediate cash to the exporter that virtually wipesout (for the exporter) the credit period extended to the importer.

This credit period extends from the time of shipment of goods tothe time of receipt of payment from the buyer abroad. The credit

period can extend from a couple of months to several years (inthe case of deferred payment contracts, project exports etc.) andhits the liquidity of many export businesses.

Forfaiting and factoring are similar in that a third (factoring orforfaiting) agency takes over the accounts/trade receivables ofthe exporter at a certain discount. The exporter in turn receivesimmediate reimbursement of the receivables less the discountdue to the factoring or


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FACTORING vs. FORFAITING

POINTS OFDIFFERENCE FACTORING FORFAITING

Extent of Finance Usually 75 80% of thevalue of the invoice

100% of Invoice value

CreditWorthiness

Factor does the creditrating in case of non-recourse factoringtransaction

The Forfaiting Bankrelies on thecreditability of theAvalling Bank.

Services provided Day-to-day administrationof sales and other allied

services

No services areprovided

Recourse With or without recourse Always withoutrecourse

Sales By Turnover By Bills


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Thank You

credit factoring and fofaiting

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