All the questions
Ans
Factoring is a means of funding of accounts receivable against Assignment in favour of a Factor. Factoring helps to generate instant liquidity and allows business continuity without disruption. In simple words, it is a receivables management and financing service designed to accelerate the seller's cash flow.
In the process, purchasing power increases, production moves up, sales turnover and profitability improve.
Factoring can be ‘with’ or ‘without’ recourse. It covers Export as well as Domestic Receivables.
In "with recourse" factoring, in the event of the buyer failing to pay on maturity, the seller has to pay back the advance obtained from the factor. In "non-recourse" factoring, Factor provides finance and bears the risk of default in case of non-payment by the buyers.
Factoring is transaction whereby the client selling goods or services on open account terms, i.e. without insisting on a fixed due date for receiving payment from the buyer, as would be under Bill of Exchange/LC , invoices the goods/services to a buyer; assigns the invoices to the Factor and receives prepayment up to 80-90% of the invoice value immediately. Thus SBIGFL turns the seller's invoices into cash, and gives the seller an instant access to his dues, instead of waiting until the payment is received from buyer.The seller will, therefore have a healthier cash flow, which will accelerate growth.
At SBIGFL, we advance upto 90% of the seller's invoice value.
- Factoring is not necessarily linked to Collateral Security,
- SBIGFL uses a high-end customized IT platform to process and deliver its services.
- SBIGFL provides credit protection against default of buyer under export transactions.
- SBIGFL provides MIS Reports and Sales Ledger Administration without additional costs.
- SBIGFL follows up with the buyers for payment of receivables.
- SBIGFL provides online access (24X7)to their Clients to view their accounts
Yes. The process when compared to selling on LC terms is much more straightforward. The documents required under Factoring are simple and not very complicated (which is generally the case under LC backed transactions).
Not at first sight.
If the interest charged by the banking system is compared directly with the discount rate of a ‘Factor’, then factoring will appear expensive as the interest charged by a factoring company is generally higher than that charged by the working capital bank. However, factoring does not end with availment of finance. A factor provides whole gamut of services like management of accounts receivables, following up with your buyers for overdue payment, providing you with MIS reports etc.
As compared to sales under LC terms, you can save the cost involved in opening an LC for your buyer and cost of LC drawing compliant documents for you. Availing factoring facility, by simply handing over of normal trade documents to the Factor and receiving money, also makes good economic sense.
The added benefits of factoring come from immediate availability of cash to the extent of 90% of invoice value (while banks fund generally to the extent of 70-75% of the invoice value), savings in the administration and collection cost of debts, savings arising out of reduction in collection period as a result of factor’s professional approach to invoice collection.
Factoring transfers risk from weaker SME seller to relatively stronger corporate buyers, thereby offering a less-risky option for funding credit sales of SMEs.
More and more customers nowadays resist buying on L/C terms. They do not like the idea of their having to finance your sales at their cost. If you want to expand your sales to a larger market, you must be able to offer more “buyer friendly” terms and that means open account or at least D/A terms. Factoring is the right solution in contemporary business scene.
- Banks provide financing based on Seller’s strength and available collateral.
- Factors assess buyer’s strength/ability to pay and provide funding against Assignment of Receivables.
- Loans from Banks appear on your Balance Sheet.
- Funding from Factors is ‘off Balance Sheet’
- In Banking, enhancement in limits is usually done on Annual Review.
- Factoring gives quick response in the interim as well.
- Banks calculate Drawing Power on periodical Statement of Current Assets
- Factors provide funding based on individual invoices
- Pricing of Banks appears prima facie finer
- Factoring is a total package of receivables management service including finance against credit sales.
- Banks discourage ‘double financing’ by Factors
- Funding by Factors is routed through the Bank account with full disclosure to the Banks
NO.Factoring offers flexible mode of liquidity against receivables. Once the line of credit is established by the Factor, the availability of cash is directly linked to sales. A growing organisation can focus on its core activities of production and marketing by outsourcing non-core activities like collection and sales ledger management to SBIGFL. As the sales increase, availability of finance increases. This helps the Seller to improve production, sales turnover and profitability resulting in uninterrupted supplies to the buyer.
Factoring is a preferred option for financing trade receivables in developed as well as emerging markets globally. It is gradually gaining more and more acceptance in India too, especially after the enactment of Factoring Regulation Act, 2011 with the buyers seeing value in the factoring transactions.
Certainly NOT! SBIGFL will not only keep the seller regularly informed of the position of his individual buyer(debtor)’s account, but will also consult him on the follow-up of collection from the buyers.
Overseas, factoring is a well accepted mode of carrying out cross-border transactions. Most established buyers are more comfortable with factoring transactions. SBIGFL being an Associate Member of Factors Chain International (FCI), can route the export factoring transactions through its counterparts abroad who are promoted by well-known international banking groups.
Ask them if they would not prefer to buy on open account terms instead of letters of credit; whether they would like to be able to pay locally or have to make international transfers, and you will find that your customers will welcome the idea of your availing Export Factoring Finance. Factoring would help you save on cost, time and provide very convenient and flexible way of continuing export trade.
SBIGFL understands and appreciates the seller's concern over this matter. SBIGFL takes up the task of regular follow of overdues /collection with the debtors as per the terms mutually agreed upon with the Seller and handles the follow-up process in a tactful manner. Infact, factoring helps the seller to avoid the embarrassment of having to directly seek payment from the buyers. Periodic submission of invoice due statements by the SBIGFL to the buyers, helps them to plan their cash flow and make timely payments.
Yes,(In fact, we would prefer if payments are routed through us even before a formal sanction). You will have to provide co-ordinates of responsible persons in your buyer’s company with whom we can follow-up for collection. Please share with your buyer contents of Assignment Letter [Notice of Assignment of Receivables(NAR)] which you shall execute in our favour upon sanction of limits. Your buyer shall be required to accept the same to create a valid assignment. In fact, we shall prefer that you arrange a meeting of our representative with your buyer so that we may explain the nuances of factoring facility you propose to avail from SBIGFL.
SBIGFL will send the seller a monthly statement of accounts which shows movement of funds. This statement will provide date-wise details of all payments received from the buyer, disbursements by SBIGFL, Factoring Charges, Discount debits etc.
Generally the customers take longer to process payments. Through our correspondent’s credit control system operating in your customer’s country, this time should be significantly reduced.
Normally there is no requirement to pledge other assets. Requirement is on case to case basis. This would also depend upon your buyer’s creditworthiness.
The seller can avail pre-shipment finance from banks and post shipment finance in the form of Export Factoring Facility from SBIGFL. The proceeds of the export factoring facility will be remitted to the bank from whom pre-shipment finance is availed by the seller which will be used for liquidation of pre-shipment finance. SBIGFL provides post shipment credit under Export Factoring in USD, GBP, EURO or INR to suit your convenience.
Factoring is suitable for most trade related transactions which have the following characteristics :
- Situation of Open Account Sales
- Involving Continuing Relationship
- Assignment of Whole Turnover with your buyer to SBIGFL.
Factoring involves following costs.
- Discount Rate :Charged on Funds-in-Use outstanding. Computed on Daily Balance Method
- Factoring Charge:Charged on the Turnover.
- Facility Set-up Fee / Facility Continuation Fee :Charged every year on FIU limit.
The Charges are linked to external credit rating of Client/debtor (i.e. Seller/buyer), transaction structure, credit period etc., Our Business Development Manager shall be happy to answer all your queries. To arrange a meeting send a request to us.
Discount Rate is levied by SBIGFL only on the amount used by the seller. The Discount Rate is calculated on a day to day basis for the actual period between funds advanced and the collections received in the account against outstanding.
Invoices factored by SBIGFL are self-liquidating in nature from payments by the debtor on the due date to SBIGFL/SBIGFL's factoring correspondents. SBIGFL will pay the seller the balance, if any, after adjusting any advance and outstanding charges.
FCI stands for Factors Chain International. It is a global network of leading factoring companies whose common aim is to promote the growth of international trade through Factoring and related financial services. As an Associate Member of FCI, SBIGFL achieves competitive advantage in international trade finance services through :
- A global network of first class factoring companies
- Modern and effective communication systems, to enable members to conduct their businesses in a cost efficient way.
- A reliable legal framework to protect exporters and importers.
- Standard procedures, aimed at maintaining a universal quality.
- Worldwide promotion aimed at positioning international factoring as the preferred method of trade finance.
When a business is having issues with aligning their receivables with their payables and banks have turned down their request for enhancement or have capped the amount of credit they will extend, it may be time to consider other options, and Factoring is one such option.
Factoring gives business owners control over the cash they need, when they need, and allows them to focus on what they do best: running their business!
