The results of Factoring in Finance Management

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This involves the sale at a discount of accounts receivable or other debt assets on a daily, weekly or monthly basis in exchange for immediate cash. The debt assets are sold by the exporter at a discount to a factoring house, which will assume all commercial and political risks of the account receivable. In the absence of private sector players, governments can facilitate the establishment of a state-owned factor; or a joint venture set-up with several banks and trading enterprises.

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Factoring is a financial option for the management of receivables. In simple definition it is the conversion of credit sales into cash. In factoring, a financial institution (factor) buys the accounts receivable of a company (Client) and pays up to 80%(rarely up to 90%) of the amount immediately on agreement. Factoring company pays the remaining amount (Balance 20%-finance cost-operating cost) to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client depending upon the type of factoring. We will see different types of factoring in this article. The account receivable in factoring can either be for a product or service. Examples are factoring against goods purchased, factoring for construction services (usually for government contracts where the government body is capable of paying back the debt in the stipulated period of factoring. Contractors submit  invoices to get cash instantly).


How it works

Client deliver goods / services to the customers and issue an invoice Client sell invoice to a financial institution (factoring company), who immediately advances the 1st installment. This will be between 70% and 90% of the gross value of the invoice. Client usually receives the advance in as little as 24 hours. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights and risks associated with the receivables. Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount After 30 to 60 days, the invoice is paid by the customer and the factoring company advances you the remaining funds as a 2nd installment, less a small financing fee. Let us see how factoring is done against an invoice of goods purchased:-


Factoring combines sales-linked finance, bad debt protection, payment collection and transmission services that helps business to compete with the ‘local supplier’ on equal trading terms. Simply, if a business is trading with another business on open account credit terms, HSBC Factoring Services has the potential to help grow business sales, speed up cash flow, collect payment on invoices and, in selected cases, even protect business from the risk of bad debt. Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. The receivable is essentially a financial asset associated with the debtor’s Liability to pay money owed to the seller (usually for work performed or goods sold).Factoring’s rationale includes the financial task of advancing funds to smaller rapidly growing firms who sell to larger more creditworthy organizations. CHARACTERISTICS OF FACTORING

Raise Cash instantly

Factoring enables you to raise instant cash against your invoices. HSBC can pay up to 90% of the value of eligible invoices within a day of submission of invoice and the delivery documents.


No Collateral Security required

No Collateral Security needed to avail finance. You pay interest only on the actual funds utilization in your account.


Concentrate on your core business

The more your sales book grows, the more we’ll help you to turn your invoices into cash. This will enable you to respond more quickly to market opportunities. Collection of receivables is also managed by HSBC enabling you to concentrate on your core business activities.


Optimize your Cash flows

Avoid the hidden costs associated with providing extended credit for your customers. Improved cash flows can help you to negotiate competitive purchase terms with your suppliers. You can also choose additional services from our offering including our Credit Protection# service to protect yourself from bad debts that may arise.

5. Period

Usually the period for factoring is 90 to 150 days. Some factoring companies allow even more than 150 days.

6. Costly source of finance

Factoring is considered to be a costly source of finance compared to other sources of short term borrowings.

7. Credit risk is analysed

Credit rating is not mandatory. But the factoring companies usually carry out credit risk analysis before entering into the agreement

Other features:-

Factoring is a method of off balance sheet financing. Cost of factoring=finance cost + operating cost. Factoring cost vary according to the transaction size, financial strength of the customer etc. The cost of factoring varies from 1.5% to 3% per month depending upon the financial strength of the client’s customer. Indian firms offer factoring for invoices as low as 1000Rs For delayed payments beyond the approved credit period, penal charge of around 1-2% per month over and above the normal cost is charged (it varies like 1% for the first month and 2% afterwards). Bad debts will not be considered for factoring. Factoring receivables is an ideal financial solution for new and emerging firms without strong financials. This is because credit worthiness is evaluated based on the financial strength of the customer (debtor). Hence these companies can leverage on the financial strength of their customers.

Eligibility Criteria

Reserve Bank of India in its notification dated 12th February 2008, has permitted banks to extend financial assistance to support the factoring business of Factoring Companies which comply with the following criteria: a) The companies carry out all the components of a standard factoring activity, viz., financing of receivables, sale-ledger management and collection of receivables. b) They derive at least 80 per cent of their income from factoring activity. c) The receivables purchased/financed, irrespective of whether on ‘with recourse’ or ‘without recourse’ basis, form at least 80 per cent of the assets of the Factoring Company. d) The assets/income referred to above would not include the assets/income relating to any bill discounting facility extended by the Factoring Company. e) The financial assistance extended by the Factoring Companies is secured by hypothecation or assignment of receivables in their favour. As per the existing guidelines, bills discounted / rediscounted by NBFCs (which is deemed to include any other mode of financing of receivables of the borrowers), except those arising from sale of certain types of vehicles, are not eligible for bank finance. Further, the unsecured loans extended by the NBFCs to other companies are also ineligible for bank finance.


The entity should be in operation for the last 3 years The entity should have generated profits during the last 2 years and should satisfy our internal credit parameters. The concern must have a positive tangible net worth.

Factoring Solutions are offered to the following type of concerns

Sole Proprietorships Partnerships Private Limited Companies


1. Proof of identity of the Sole Proprietorship Firm (any one of the following):

Sales/VAT/Service tax/Excise registration OR Registration under Shops and Establishment Act OR PAN Card/IT Return of the concern OR Water/Electricity/Municipal tax bill in the name of the concern OR MAPIN Card in the name of the concern

1. Proof of individual identity to be submitted for the sole proprietor (any one of the following):

Passport OR Photo PAN card OR Voter’s Identity card OR MAPIN Card OR Driving License

1. Proof of Residence Address of sole proprietor (any one of the following):

Passport OR Voter’s ID OR Driving License OR Ration Card OR Society outgoing bill OR Life Insurance Policy OR Electricity bill OR Telephone (Land/Mobile) Bill

2. PAN Card/PAN allotment Letter/Form 60 of the concern

Only Passport can be used as both Proof of Identity and Proof of Residence.


1. Proof of identity of the Partnership firm (any one of the following):

Sales/VAT/Service tax/Excise registration OR Registration under Shops and Establishment Act OR PAN Card/IT Return of the concern OR Water/Electricity/Municipal tax bill in the name of the concern OR MAPIN Card in the name of the concern

1. Proof of individual identity to be submitted for all partners (any one of the following):

Passport OR Photo PAN card OR Voter’s Identity card OR MAPIN Card OR Driving License


1. Proof of residence address to be submitted for all partners (any one of the following):

Passport OR Voter’s ID OR Driving License OR Ration Card OR Society outgoing bill OR Life Insurance Policy OR Electricity bill 2. Partnership Deed: Partnership deed is required


3. PAN Card/PAN allotment Letter/Form 60 of the concern


1. Proof of identity of the Private Limited Company (any one of the following):

Sales/VAT/Service tax/Excise registration OR Registration under Shops and Establishment Act OR PAN Card/IT Return of the concern OR Water/Electricity/Municipal tax bill in the name of the concern OR MAPIN Card in the name of the concern


2. Memorandum & Articles of Association


3. Certificate of Incorporation


4. Board Resolution


5. Copy of annual return establishing the shareholding pattern


Proof of individual identity to be submitted for all the authorized signatories, all principal shareholders (with more than 10% shareholding) and at least 2 Directors (including the Managing Director)

1.Any one of the following-

Passport OR Photo PAN card OR Voter’s Identity card OR MAPIN Card OR Driving License


2. List of Directors


3. Copy of Form 32 filed with ROC


4. PAN Card/PAN allotment Letter/Form 60 of the concern



Pre – Approval

Profit & Loss and Balance Sheet for the last three years audited by a C.A. Information on projected sales to the customers.


Post – Approval

Personal guarantee of the promoter directors along with their certified net worth statements is to be provided. Net worth statements of the promoter directors. Letter of disclaimer from existing charge holders for the factored debt*. Letters to be sent to your customers by you instructing them to route payments through HSBC**. Demand promissory note in favour of HSBC. Board resolution of the company or Partnership letter or declaration from the sole proprietor providing a list of authorized signatories. Execution of a Factoring agreement and acceptance of terms detailed in the Facility Advice Letter. Power of Attorney in favour of HSBC.


A) Recourse Factoring and Non Recourse Factoring. B) Disclosed Factoring and Undisclosed Factoring. C) Full Factoring and Limited Factoring. D) Bulk Factoring. E) Maturity Factoring. F) Channel Factoring.


In recourse factoring, client undertakes to collect the debts from the customer. If the customers don’t pay the amount on maturity, factor will recover the amount from the client. This is the most common type of factoring. Recourse factoring is offered at a lower interest rate since the risk by the factor is low. Balance amount is paid to client when the customer pays the factor.


In non recourse factoring, factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of non recourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization.


In disclosed factoring client’s customers are notified of the factoring agreement. The buyer is informed that the third party (the factoring company) is party to. The buyer is asked to make payment to factor on due date.


In undisclosed factoring, client’s customers are not notified of the factoring arrangement. Sales ledger administration and collection of debts are undertaken by the client himself. Client has to pay the amount to the factor irrespective of whether customer has paid or not. But in disclosed type factor may or may not be responsible for the collection of debts depending on whether it is recourse or non recourse.


It is made up of all the factoring services – finance, sales ledger administration, collection, credit risk cover and the arrangement is fully notified to the buyers.


The factors choose limited number of invoices to be subject of factoring agreement with the clients.


This type of factoring is basically used as a method of financing book debts. Under this the client continues to administer credit and operate sales ledger. The factor finances the book debts against bulk either on ‘recourse or without recourse. This sort of factoring became popular with the development of mini-computers market where marketing and credit management was not a problem but the firms needed temporary financial accommodation. Those companies which have good systems of credit administration, but need finances, prefer this form of factoring.


It can be best described as a full service factoring without finance. Because finance is not offered the security requirements of the factor are quite different. The risk lies only in the credit cover provided on the underlying buyers. There is no seller risk. For the same reason there is no finance charge and the factor takes his remuneration only from the commission fee. The factor pays the seller for the A/R in one of two ways: 1. After an agreed period from invoice date, for example 60 days. This is known as the “maturity period”. The benefit of this method is that the seller knows exactly when he will be paid and so can plan his cash flow accordingly; or 2. On receipt of payment from each buyer or on the insolvency of the buyer provided that the buyer is credit covered. This is known as the “pay when paid” method. To benefit from this service the seller will have adequate sources of finance elsewhere and is looking to the factor to strengthen a weak administration or maybe reduce overheads and provide protection.


Channel Financing enables clients to discount their receivables on account of supplies made to their dealers within pre-defined limits. Payment is received from the dealer on the due date. It ensures immediate realization of sales proceeds for clients, making it practically a cash sale. On the other hand, the dealer gets credit for a pre decided tenor sanctioned by us, enabling smooth liquidity management .An advance of up-to 95% of the invoice value/ bill value can be provided. Collection of receivables and Maintenance of accounts relating to accounts receivables


Reverse factoring is the discounting of suppliers’ bills in respect of the client’s regular purchases from them. Only regular suppliers of the client, having a relationship of minimum 6 months, are considered. Advance of up-to 100% of the Invoice value/Bill value can be provided to the supplier. Credit is given of around 120 days

Types of factoring solutions provided by HSBC

HSBC provides finance solutions for all your sales and purchase requirements on the domestic front, and various export-factoring product services on the international level. Our factoring services offer a comprehensive receivables and payables management solution which includes transaction financing, credit protection, sales ledger administration and payment collection.


It includes comprehensive receivable management service encompassing finance, credit protection, collection and sales ledger management for exports on open account terms. An advance up to 95% of the invoice value can be provided. It covers the credit default risk. L/Cs from foreign buyers are not required. There is no recourse on the client. In this there are usually two factors. The export factor looks at financing the exporter and sales administration (presenting invoices at the right time, collecting payments being the key tasks). The import factor is interested in evaluating the buyer, collecting the money on time at the same time ensuring that he is protected against default. It encompasses all the four services, that is, pre-payments, sales ledger administration, credit protection and collections.

Step Guide to International Factoring:

The importer places the order for purchase of goods with the exporter. The exporter requests the Export Factor for limit approval on the importer. Export Factor in Turn forwards this request to an Import Factor in the Importer’s country. The Import Factor Evaluates the Importer and conveys its approval to the Export Factor who in turn conveys Commencement of the Factoring arrangement to the Exporter. The exporter delivers the goods to the importer. Exporter produces the documents to the Export Factor. The Export Factor disburses funds to the Exporter upto the prepayment amount decided and at the Same time the forwards the documents to the Import factor and the Importer. On the due date of the invoice, the Importer pays the Import Factor, who in turn remits this Payment to the Export Factor. The Export Factor applies the received funds to the outstanding amount of the advance against The invoice. The exporter receives the balance payment. In the international product suite, apart from the existing export-factoring product, we are now poised to launch import factoring as well. That will make us the first and only Bank offering the entire bouquet of factoring products to customers in India.


Domestic factoring provides funding against invoices raised on customers within India. In addition to this, HSBC also takes care of ledger management. Credit protection is also offered as an optional service feature.

Steps to avail Domestic Factoring

Field survey of your sales ledgers Credit assessment of your company Setting of Credit limits for each of your customers Signing of factoring agreement between you and HSBC Your customers accept to route all payments through HSBC Post delivery of goods, forward copies of invoices and supporting documents to HSBC You can draw prepayments up to the agreed limit


Invoice Factoring is an alternate solution to domestic factoring, if you would like to avail financing against your accounts receivables, but would like to continue managing collections. The steps involved are the same, as domestic factoring except you to need not inform your customers about the arrangement with HSBC. Your customers would continue to pay directly to you. HSBC would not be responsible for collections of the proceeds. As soon as your customers make the payments, you would have to remit the payment to HSBC.


Export factoring provides immediate financing against your export receivables. Financing can be availed in Rupees or in foreign currency. We offer Credit protection for your export receivables. As part of the full service package, we also offer Sales Ledger Management wherein we handle all your ledger administration and collection jobs through our overseas factor partners, to save you, both time and overhead costs.

Steps to avail Export Factoring:

Field survey of your sales ledgers Credit assessment of your company Setting of Credit limits for each of your overseas customers Signing of factoring agreement between you and HSBC Post shipping of your goods, forward copies of invoices and supporting documents to HSBC You can draw prepayments up to the agreed limit Under HSBC’s supervision, an overseas factor partner collects and transfers payments to HSBC


1. Finance:

One of the key elements in the need for additional working capital is the growth in the accounts receivables. In factoring contract the factor agrees 2 pay the seller a substantial proportion of the value of the qualifying accounts receivables as soon as they come into existence. The seller will receive the balance when the factor has collected from the buyer.

2. Accounts receivables ledger administration:

The factor takes the seller’s buyer accounts onto his books and updates these accounts with all transactions – invoices, credit notes, etc. Where appropriate, the factor sends statements to the buyers showing what should be paid to the factor and how this amount is made up. The seller receives regular report on the status of the ledger and so is able to keep fully informed about the performance of his buyers.

3. Collection of the accounts receivables:

One of the problems with the open account payment is that there is no automatic means of initiating payment from buyer as one would find with an accepted bill of exchange, for eg. the factor’s administration system. Therefore, is designed to prompt the buyers for payment systematically by letter and to give the collection staff he necessary information to seek payment from the buyer by telephone when necessary. In cases of serious delay legal action will have to be taken. If an accounts receivables is credit covered, the cost of this legal action will usually be borne by the factor.

4. Credit cover:

If the buyer defaults in his payment, the factor will pay the seller normally 100% of the credit covered accounts receivables when: The buyer is insolvent (as defined in the contract). The accounts receivable is (are) 90 days past the due date on the invoice. This period may vary in a domestic contract – some factors do not have a guarantee period in their contracts but simply pay if and when the buyer becomes insolvent, as defined in the factoring contract At present credit protection is being offered only for EXPORT deals through Two Factor arrangements.


Benefits of Factoring

1) Flexible finance enables you to accept new orders with confidence. 2) Available funds can help to give you greater buying power with your suppliers. 3) It helps you avoid the dangers of over-trading. Your funding keeps pace with your sales – setting up new limits and reviewing those in place is now quicker and easier 4) Based on sales invoices, additional fixed asset security is not normally required. 5) Protects your profits and cash flow against the ever-present trade credit dangers of bad debt (with pre-approved individual debtor limits). 6) It helps to release additional time and resources (from chasing and processing payments) enabling you to concentrate on your core business activities. 7) Our international factoring correspondents across the globe have country specific knowledge and can correspond with your buyers in their own language. Other Benefits: Collateral Free. Higher pre-payment % ensuring more finance available. Helps the client to take a credit decision on buyer. Generates cash as soon as the delivery of goods is completed. Value added services like collection / ledger management. Reduces the costs of collections.


BILL DISCOUNTING FACTORING 1. Individual Transaction. 1. Limit Set on turnover basis. This also gives the client the liberty to draw desired finance only. 2. Each bill has to be individually accepted by the drawee. This takes time. 2. A onetime notification is taken from the customer at the commencement of the facility. 3. Stamp duty is charged on certain usance bills together with bank charges. 3. No stamp duty is charged onthe invoices. No charges other than the usual finance and service charge. 4. Grace period for payment is usually 3 days. 4. Grace period of 30 days. 5. Original documents like LR, RR and Bill of Lading are to be submitted. 5.Only copies of such documents are necessary. 6. Charges are normally up front. 6. No upfront charges. Finance charges are levied on only the amount of money withdrawn with monthly rests.


CASH CREDIT FACTORING 1. Margin retained on receivables are usually 40-50% 1. Margin usually retained is 15%. 2. Limits computed based on historical data. 2. Limits computed based on projected turnover basis. 3. The client has to submit various statements / stock statements etc to thebank 3. No statement to be given. On the contrary we furnish various reports to both the client and the customer 4. No collection services performed for the clients. 4. One of the functions of the factor is debt collection 5.No Value added services like Sales Ledger Maintenance and Credit Protection provided 5. It provides all these services 6. Collateral security required 6. It is collateral free.


Open account/Credit Sales. Defined Trade Terms. Ongoing Transaction with established track record. No two way trading. No restriction on Assignment of Debts. The buyer is not a Group/Associated Company. The product is not a capital good. Free from Warranties/Indemnities.


Minimum Turnover > INR 100 M. Positive PAT and TNW for last two years. I.T. Returns have been filed for last 2 years. Not on RBI Defaulter’s List and HUB Blacklist. The promoters are not on NMAS / MCNF / CIBIL checklist. Gearing less than 4 and Leverage less than 6. Minimum of 5 factorable debtors required for a deal.


Parameter Cap Value Minimum Fund in use Limit INR 10 M Maximum Fund in use Limit INR 50 M Maximum Trade Term 120 Days Margin Higher of 15% or 2X historic dilution Concentration % 30% (50% for the first 2 months) Notice of Assignment Required (Prior to disbursement) Letter of Disclaimer Required Turnover through HSBC 100%

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