A Report on

ANALYSIS OF

FACTORING SERVICES

&

CREDIT CONTROL

FOR

BHARTI TELETECH LTD

PREFACE

The present study was undertaken as a part of the organizational training (1) Component

of the PGDMBA course of masters in business studies in financial management.

The object of this training was to develop information search skills into students. This

enables them to gather information on a given subject in a systematic and consciously

planned manner.

The study was done as the project for BEETEL Ltd, New Delhi. Beetel is engaged in

production of range of basic and cordless phones and is also National distributor of

Motorola handsets in India.

The study was carried out during the months of June-July’07. Its objective was to study

the concept of Factoring in detail in context of distribution of Motorola handsets by

BEETEL in India and suggests about the study.

CONTENTS

Certificate

Acknowledgement

Preface

1. Executive summary

2. Introduction

3. Objective of the study

4. Company profile

5. Concept of Factoring

- BHARTI

- BEETEL

6. Factoring benefits

7. Working of Factoring

8. Factoring strategies

9. Methodology

10. Beetel and TD

11. Beetel and UTI Bank

12. Beetel and NEW INDIA INSURANCE Group

13. Working and Credit Control in Beetel

14. Recommendations and suggestions

15. Conclusion

EXECUTIVE

SUMMARY

EXECUTIVE SUMMARY

Management of working capital is a matter of balance. A company must have sufficient

cash on hand to meet its immediate needs while ensuring that idle cash is invested to the

organization’s best possible advantage. The most important component of the working

capital is debtors because the entire operating cycle depends upon the turnover period of

the debtors and here the Factoring concept has witnesses a heralding revolution during

the recent years. Factoring is proving a powerful tool in the hands of management for

having 100% control over the debtors of the company.

In the analysis done for BEETEL, a Bharti Group Company, it was found that the debtors

has increased due to drastic increase in sales because of the distribution business of

MOTOROLA products and accessories. Company has managed efficiently to decrease its

debtor’s turnover period through the factoring services of UTI bank. BEETEL has

entered into an agreement with the UTI bank for the receivables Factorings for

conversion of MOTOROLA sale invoices into instant cash. In this way company has

managed to convert their receivables into instant cash to meet its day to day

requirements.

Thus, good management of receivables is a part good financial management of BEETEL.

Its effective use is contributing to the operational efficiency of the company, resulting to

increased turnover and maximum returns.

Objectives

Of

The Study

OBJECTIVES OF THE STUDY

Before entering the Beetel, Factoring was an unknown concept to me, so it being the vast

topic is was really difficult to plan out the objectives. But howsoever the objectives

which were planned after entering the Beetel and understanding the concept of Factoring

are:

Understanding the concept of Factoring

Understanding the strategies related to Factoring

Client dealing/TD dealing

How to make factors

Considerations while taking Insurance cover

Managing credit with factoring

Company Profile

-

BHARTI

BHARTI ENTERPRISE

Bharti Enterprises has successfully focused its strategy on telecom while straddling

diverse fields of business. From the creation of 'Airtel', one of India's finest brands, to

becoming the largest manufacturer and exporter of world class telecom terminals under

its 'Beetel' brand, Bharti has created a significant position for itself in the global

telecommunications sector. Bharti Airtel Limited is today acknowledged as one of India's

finest companies, and its flagship brand 'Airtel', has over 40 million customers across the

length and breadth of India.

While a joint venture with Teletech Inc., USA marked Bharti’s successful foray into the

Customer Management Services business, Bharti Enterprises’ dynamic diversification

has continued with the company venturing into telecom software development. Recently,

Bharti has successfully launched an international venture with EL Rothschild Group

owned ELRO Holdings India Ltd., to export fresh Agri products exclusively to markets

in Europe and USA. Bharti also has a joint venture - ‘Bharti AXA Life Insurance

Company Ltd.’ - with AXA, world leader in financial protection and wealth management.

Bharti has recently forayed into retail business under a company called Bharti Retail Pvt.

Ltd. It also has a MoU with Wal-Mart for the cash & carries business.

Highlights

Bharti Enterprises announces new Apex level Strategic Organization Structure.

Bharti Announces Strategic Roadmap for its Retail Venture

Bharti Group has an arrangement to buy 5.6% direct interest of Vodafone in

Bharti Airtel Limited for US$1.6 billion

Sunil B. Mittal chosen for this year’s Padma Bhushan Awards.

Bharti Airtel receives Letter of Offer to provide 2G and 3G mobile services in Sri

Lanka

Group Structure

STRUCTURE OF THE COMPANY

Company profile

-

BEETEL

BHARTI TELETECH

PROFILE

In 1985, Bharti Teletech entered into a technical

collaboration with Siemens AG, the German

technological giant and set up a plant in

Ludhiana to manufacture telephones.

Come 2005, and Beetel has journeyed across

twenty years of creating history. In 1991, Beetel manufactured phones for

'Sprint', the American telecom mammoth. Shortly after, in 1993-94, came ISO

9001-2000 accreditations for the manufacturing units - by this time two in

numbers, at Gurgaon and Ludhiana. And in a short span of time, Beetel was

already the market leader. Cornering half of the Indian market, Beetel became

'India's Favorite Phone' .

Today Bharti Teletech has two ISO 9000 certified plants with an annual capacity

of 5 million units p.a. Bharti became the first company to manufacture cordless

telephone and telephone answering machines in India. It is also the first to

launch SMS phones on fixed line in the country thereby heralding a revolution in

fixed line SMS telephony. In line with customer needs, Bharti was also the first

to launch backlit LED and GSM Interference free phones. Our product range

includes the BASIC Phones, CALLER ID Phones, CORDLESS Phones, 1.8 GHz

DECT, 2.4 GHz phones, VOIP Phones, broadband (ADSL) equipments like

Modems, routers and set top boxes.

BTTL is the first Indian company to manufacture 20 million phones. Today, one out of

every three phones in India is a Beetel. With rapid growth over the years, Bharti Teletech

today is the largest manufacturer of phones in the Globe outside China. Bharti Teletech

commands a lion's share of over 90%. In the extremely competitive BSNL/ MTNL

segment.

Bharti became the first company to export phones to Sprint Inc. USA - recognition of our

world class quality. Today, BTTL is present in 30 countries across 5 continents

Exports are a huge thrust area for Bharti. In 1991, Bharti became the first company to

export phones to Sprint Inc. USA – recognition of our world class quality. The export

operations have been highly successful over the years. In 2003-04, exports crossed the

half million mark - a quantum jump since we started. Today, we are present in 30

countries across 5 continents despite intense competition from the strongest brands in the

world. Brand building initiatives have also taken fruit in the global arena. The Beetel

brand is present in Vietnam, Iran, Chile, Oman, Bangladesh, Mauritius and Sri Lanka.

This list continues to grow with each passing month and it is a matter of time before

Beetel becomes a truly global brand.

Bharti Teletech Team is upbeat to create History by crossing a Sales Turnover

beyond 2000 crores in FY 2006-07 against the last year's 543 crores

"The story continues. The canvas has broadened immeasurably, so have the

challenges. And it is not long before India's Favorite Phone makes its presence

felt across the globe."

ACHIEVEMENTS

Trend has won GOLDEN PEACOCK AWARD as the only phone with SIM

card reader. The model Millennium Clip Max (A high end Caller ID and Two

way speaker phone) recently launched in the market WON a GOLDEN

PEACOCK AWARD for INNOVATIVE DESIGN.

Beetel has a range of over 35 models across basic, feature and cordless segments

and continues to add a new model every month. With a current market share of

over 40%, Beetel is the first choice of the Indian consumer. In the growing

private service provider segment, Bharti Teletech commands a lion’s share of

over 90%. In the extremely competitive BSNL/ MTNL segment, we have crossed

a market share of 50%. BTTL has successfully met the challenge of providing

quality products at competitive prices.

Following are the new products recently introduced in the open market :-

DB 9200 - Caller Id with Speaker

CB 60000 -2.4 GHz Cordless Phones

CB 61000 -2.4 GHz Cordless Phones with base

dialing

CB 59000 -2.4 GHz Cordless Phones with

color Screen

CB 49000 - Low Priced 2.4 GHz Cordless

Phones

DF 8800 -Caller Id Phone with large Screen

Display

Following are the new products recently introduced for the DOT market as per

new TEC specifications (GTEL-02/04); all these models are GSM interference

free.

IRIS 2K3

GARNET

PERIDOT (A CLI PHONE)

Beside this company has maintained its leadership in all chosen markets like

PSP, DOT, OPEN MARKET & EXPORT (exporting to 30 countries across five

continents world wide

DOMESTIC

After years of careful and focused brand-building, Beetel is recognized as a

trusted brand in India and is poised to take on global players in the most

competitive international markets.

Beetel was the first Indian brand to launch caller ID phones in India and the first

to bring down the price of cordless phones to an affordable range at below Rs.

2000.

Beetel has also pioneered SMS phones, the first in India. With this landmark

development, India now has the pride of joining the select set of countries that

offer SMS on and from fixed-line telephony service platform worldwide. For the

consumer in India, Beetel is truly ringing in the future. Indian PTT has accepted

Beetel instruments whole heartedly and the brand has a 60% share in this market.

The private service providers have shown great faith in Beetel's products and

appreciate the company's ability to customize the phones to their specifications.

Beetel has garnered over 95% of this market.

Beetel has remained the No. 1 brand in the Indian retail market, with a market

share of over 50%.

The company's marketing network encompasses over 580 distributors and over

30,000 dealers, taking Beetel phones to every corner of one of the biggest

markets in the world.

INTERNATIONAL

After years of careful and focused brand-building, Beetel is recognized as a

trusted brand in India and is poised to take on global players in the most

competitive international markets.

Overseas, the company has a richly diversified customer base in over 30

countries across five continents. The markets include the USA, South America,

Eastern Europe, the Middle East, South East Asia and Africa. Telephone

instruments are supplied to Siemens, Akai, Connair and the Sprint Group in the

USA among many others.

The Electronics and Computer Hardware Export Promotion Council conferred

upon Bharti Teletech, the award for the Top Telephone Instrument Exporter.

The company exemplifies a marketing success story that writes new chapters of

achievement with each passing year.

COMPANY’S VISION’S AND VALUES

VISION

To be a leader in Telecom and allied products

in chosen global market.

VALUES

Customer

We will be responsive to the needs of our

customer

People

We will trust and respect our employees

Learning

We will continuously improve our products and

services-innovatively and expeditiously

Community & Partners

We will be transparent and sensitive in our

dealing with all stakeholders

QUALITY POLICY

At Bharti Teletech quality has always been among the top priority .

QUALITY OBJECTIVES

To meet customers' requirements in terms of functionality, safety, aesthetics, life

expectancy and taking effective actions on their feedback's.

To ensure planned results and continual improvements in all operations (processes and

products).

To increase productivity by reducing rejections & non-value adding activities, and

bringing automation.

To effect continuous improvements in Customer Satisfaction Index.

To ensure training of employees as per defined targets studying needs and

requirements.

To ensure that all statuary and regulatory requirements are complied with.

QUALITY CULTURE

Providing training on Quality education system right across the entire organization to

carry out continuous Improvement activity in collaborative way.

Deployment of Quality policy & Quality Objectives through out the Organization in a

structured way & is headed by CEO as Chairman of Quality Improvement Team.

Cross-functional Improvement teams to promote Synergy through sharing.

All the employees always carry out an Improvement project, which leads to improvement

in their individual efficiency.

Rewarding/ recognizing the good performers (individual as well as teams) in monthly /

quarterly and yearly functions.

Encouraging innovation by way of giving token reward for each suggestion and running

trophy to department giving maximum suggestion per person per month.

Encouraging people to work as a team in Small Group Activities (TCAs) and

Quality Improvement Projects (QIPs)

QUALITY ACHIEVEMENTS

Bharti Teletech Limited is a Quality Conscious organization & continuously Strives

for Quality Improvement through Process Management. Some of the achievements

which have come out of company's unstinted faith in investing for quality are :

Awards Golden Peacock Innovative Product/Services Award in the Telecommunication Sector

for the year 2002, the Golden Peacock for Innovative Management for the year 2004 and

Most Innovative Product

in 2005.

Recipient of the ESC Award for Excellence in Exports in Telecommunication Equipment

in 2001-02 and 2002-03.

Winner of the Voice & Data Award for "Top Telephone Manufacturer" in 2002-03 and

2003-04.

Won the Consumer World Award for 2004.

Awarded the "Top Fixed Line Phones Company-2006" by Voice and Data

BEETEL’S GROWTH

Beetel has established itself as a leader in "Modems". Beetel has also entered the "Set

Top Box" market and is on foray in this segment.

Bharti Teletech has joined hands with world leaders in their categories for manufacturing

and Distribution of their products through it's Channel.

In addition to being manufactures and Distributors of "GE Phones" in India and select

SAARC countries, today BTTL are National Distributors for-

"Motorola" GSM mobile Handsets and Accessories

"Polycom" Audio and Video Conferencing Systems

"Microsoft X Box" gaming devices.

DISTRIBUTION BUSINESS OF

BEETEL

GE POLYCOM

XBOX MOTOROLA

CONCEPT

OF

FACTORING

SERVICES

INTRODUCTION TO THE CONCEPT OF

FACTORING

Factoring is a financial service designed to help firms to arrange their receivable better.

Under a typical factoring arrangement a factor collects the accounts on due dates, effects

payments to the firm on these dates and also assumes the credit risks associated with the

collection of the accounts.

 Sometimes the factor provides an advance against the values of receivable taken over by

it. In such cases factoring serves as a source of short-term finance for the firm.

 In order to provide a gamut of financial services under one roof, Corp. has also started

factoring services. Under the scheme Corporation shall be at the time being only

providing advances or prepayments against receivable and other services provided by the

factor such as debt collection & administration of sales ledger etc. shall be taken later on.

Under the scheme receivables only arising out of domestic trade shall be considered for

factoring. Supplier/Borrower shall draw bills of exchange for goods supplied and the

purchaser shall accept that. After acceptance of bills of exchange, Corporation shall make

prepayment of 80% of invoice value after deducting its discount charges @ 17% to 18%

p.a. for period of bill of exchange to supplier. Balance payment of 20% of the invoice

value shall be made after collecting the payment from purchaser. If purchaser fails to pay

the due amount on due dates, the supplier shall make the payment. Borrower/ Supplier

shall submit Bill of Exchange along with invoice LR/RR receipts. Suppliers to be eligible

for factoring must have minimum track record of 03 years with consistent profitability

and minimum net worth of Rs. 25.00 lacs.

Usually before providing advance payments to supplier an agreement is entered with

supplier for arising debts of purchaser to Corporation and Corporation make advances

only against invoices drawn to this particular purchaser. Sub-limit of each purchaser is

fixed and sum of these sub limits is over all limit of supplier. Usually purchaser should

have been dealing with supplier for minimum period of two years. Maximum limit of

each purchaser should not exceed Rs. 25.00 Lacs at a time.

Usually limit for factoring is calculated on the basis of the projected receivables on credit

sales of the company and deducting existing bills/books debts limits enjoyed by the

company from bank. Maximum limit shall not exceed two months average turnover of

the supplier as per last audited balance sheet or projected turnover of current year subject

to maximum of Rs. 100.00 Lacs.

Creative Alternative Financing Mechanism

The word "factor" comes from the Latin "factare" meaning "to make or to do". This

financing mechanism dates back to the time of Hammurabi. It has been part of the basic

fabric of all trade.

The concept of "making it happens now" continues. Essentially it is the sale or

assignment of a sale, trade, or accounts receivable account for immediate cash. By

definition, it provides any business from start-up to mature companies (at any size),

access to immediate cash and improved cash flow for expansion or growth but without

diluting equity or incurring debt.

The reasons for using this financial tool are just as numerous as they are varied:

take advantage of trade discounts or other early payment options with suppliers or

vendors and

ability to re-invest immediately to acquire new sales opportunities;

Since the factoring firm effectively assumes the credit evaluation risk of accounts

receivable that may translate into decreased internal costs for accounts receivable

administration, more efficient and effective customer accounts collection (quicker pay),

and better information for management on the credit worthiness of the firm's clients;

increased working capital turnover as well as a reliable source of immediate

financing; and

Other financing options may not be available or timely for firm requirement(s). .

Factoring is not a collection system for bad debts or even slow pay accounts. Use of

factoring may however tend to speed the payment from an otherwise slow-pay client

once the disciplined payment techniques of a qualified factor are introduced. As with any

"financial tool", there may be wide variations in applicable terms, conditions, and cost

rates for its utilization.

For example, advance rates (percentage of invoice paid in advance of collection) may

vary due to account risk, industry, and factoring firm. The discount rate (fee charged by

the factor for the financing) may also vary by actual risk in the account, industry, and/or

factor firm. Transactions may either be "recourse or non-recourse" (return liability or

guarantee of collection from the firm) which may take the form of merely replacing a

receivable if it reaches a previously agreed upon age.

All of these variables then come together in a "risk evaluation" cost rate or fee for the

factoring service. As with any type of financing, the greater the perceived risk, the greater

the cost for the service. The range for the first 30 days might be expected to be 2%-7% of

the gross value of the account financed, with 5% being typical.

There may also be a wide variety of other terms and conditions in the transaction such as:

Minimum invoice amounts (i.e., $200 - $500), minimum monthly volumes (i.e.,

$10,000 - $500,000), and/or time period commitments (i.e., 6-12 months).

Notification and non-notification to the receivable account that a factoring

transaction has occurred.

Just like all financing options, the business firm must evaluate its own individual needs

and requirements including a focused evaluation of all actual or potential advantages

versus the costs in the transaction. In most circumstances and at every stage of

development, factoring, if properly utilized, can be a very valuable financial tool to

achieve expanded sales and company growth.

Not all factoring companies are alike, often with wide variations in terms, conditions, and

rates depending on your firm's needs and accounts receivable (as well as size and

geographic coverage’s -local, regional, and national).

Factoring is often used synonymously with accounts receivable financing or debtor

financing or invoice financing. Factoring is a form of commercial finance whereby a

business sells its accounts receivable (in the form of invoices) at a discount. Effectively,

the business is no longer dependent on the conversion of accounts receivable to cash from

the actual payment from their customers, which takes place on typical 30 to 90 day terms.

Businesses benefit from the acceleration of cash flow by obtaining cash from the factor

equal to the face value of the sold accounts receivable, less a factor's fee.

Factoring is considered off balance sheet financing in that it is not a form of debt or a

form of equity. This fact makes factoring more attainable than traditional bank and

equity financing.

Debtor factoring has been established as a method of raising working capital for some

200 years.  Over that time, numerous product variations have emerged until today there

are a diverse variety of services and optional extras available.  

In essence, there are four basic services of which the factoring company will offer their

client some combination:

-Early Payments (including overpayments in some cases)

- Credit Control

- Sales Ledger Administration

- Non Recourse Credit Protection

The first is an Early Payment against the credit invoices that they raise.  When a

business first takes up a factoring facility there will normally be an outstanding sales

ledger of unpaid invoices.  The factoring company will make available a prepayment

against these invoices, often up to 85% of their value, and this can create a substantial

cash injection for the business.  As the business continues to raise invoices, they are

passed to the factoring company who will provide further funds against those invoices. 

The factors early payments are then repaid as the invoices are paid by the customers.  In

this way the facility is of a rolling nature that will grow in line with the sales that the

business makes.  This can be considerably more attractive than traditional overdraft

lending which is often much less flexible.  These funds can be put to good use within the

business e.g. settling supplier invoices early in order to receive further discounts.

Credit Control is a collections service whereby the factoring company will employ letter

and telephone based chasing techniques to ensure that payments are received from

customers on a timely basis.  Indeed, a factoring company can often improve the overall

debt turn (the average number of days in which sales invoices are paid) of its client which

creates a further cash flow benefit.  The other advantage of outsourcing debtor credit

control is that a factor can often offer this at a fraction of the cost of employing one or

more members of staff.  This can translate into another tangible saving for a client.  Even

where the owners of small businesses handle the credit control themselves, it has to be

carried out during office hours and this is time that the factor can free up for the owner,

enabling them to spend that prime time seeking new sales.

Sales Ledger Administration is a service whereby the factor will create and maintain a

debtor sales ledger for the client's business.  As invoices and cash are received so the

factor will post them to the ledger and the factor will provide this information to the

client either via electronic links or paper print outs. 

Non Recourse Bad Debt Protection is an optional additional service whereby the factor

will insure the client against non payment by customers that the factor has pre-approved.  

The client will normally advise the factor of the details of new customers that they wish

to trade with and the factor will investigate the credit standing of that business in order to

grant a credit limit.  The client can choose to exceed the level of the limit that is granted

but if they trade within the limit they will enjoy the peace of mind that comes from

knowing that they will get paid by the factor should the customer go bust or fail to pay by

reason of protracted default.

The number of businesses that use debtor factoring has continued to grow significantly

year on year and on average a client’s stay with their providers for a number of years.

This supports the case for factoring as a cost effective way of saving money and raising

working capital for expansion.  

Characteristics of factoring

Usually the period for factoring is 30 to 90 days. Some factoring companies allow

even more than 150 days.

Factoring is considered to be a costly source of finance compared to other

sources of short term borrowings.

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.

Credit rating is not mandatory. But the factoring companies usually carry out

credit risk analysis before entering into the agreement.

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

depending upon the financial strength of the client's customer.

Indian firms offer factoring for invoices as low as Rs1000.

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)

TYPES OF FACTORING

[A] Notified, or full service factoring

With notified factoring, the debtors are aware of the finance facility as the factoring

company normally does the credit control, that is, collects the outstanding debts.

[B] Confidential, or invoice finance

With invoice finance (sometimes called confidential or non-notification factoring), the

factoring facility is undisclosed, with the seller usually retaining the credit control

function.

[C] Recourse factoring

Recourse factoring is now the most common type of factoring transaction. This factoring

transaction allows the factor to go back to the seller if payment is not received (normally

after a 90 day period). The credit risk does not transfer to the factor during the recourse

factoring process.

Normally, in the event of non-payment by the customer, the seller must buy back the

invoice with another invoice (credit worthy). Recourse factoring is typically the lowest

cost for the seller because the risk for the factor on the funding transaction is lower.

[D] Non recourse factoring

Non recourse factoring is the traditional method of factoring and puts the risk of non-

payment, in the event the debtor becomes insolvent, fully on the factor. If the debtor

cannot pay the invoice due to insolvency, it is the factor's problem to deal with and the

factor cannot seek payment from the seller. The factor will only purchase solid credit

worthy invoices and often turns away average credit quality customers. The cost is

typically higher with this factoring process as the factor assumes a greater risk.

BENEFITS OF FACTORING

No collateral security required.

As a result of factoring services, the enterprise can concentrate on manufacturing

and selling.

The risk of bad debts is eliminated.

The factoring institution also provides advice on business trends

Increase Cash Flow Without Increasing or Adding Debt

Fast and Easy Process

Cash Received for Your Invoices in 24 Hours or Less

Eliminate Long Billing Cycles

Add Capital to Your Business That is Not a Loan 

Pay Off Past Due Operating Expenses

Increase Marketing Efforts 

Provide Consistent Weekly Cash Flow to Allow for Better Planning and Growth

Reduce Stress Involved With Not Having Cash to Meet Business Obligations

Reduce Bad Debts by Using the Factor’s Credit Department

Make Professional Quick Credit Decisions for New Customers

Improve Decision-making on New Business

Reduce Administration Costs Associated With Collection Activity

Receive Professional Accounts Receivable Management

Offer Better Terms to Customers Allowing You to Gain More Business

Funding is Based on the Financial Strength of Your Customers

Gain Needed Capital Without Giving Up Equity

Concentrate on Important Parts of Your Business Instead of Collecting Invoices  

Use Your Customer's Good Credit as Leverage for Better Cash Flow

Factoring includes not only financing

Factoring, contains aside from financing, an additional service as well. This means that

by concluding an Agreement on the Future Assignment of Receivables in addition to

financing it incliudes administration and monitoring, and to ensuring its collection and

the transfer of the additional payment to client account. In case of delay by the debtor

factor send reminder notices, contact the debtor by phone and in writing, monitor the

status of the receivable and take steps aimed at collection of the outstanding amount.

This way, factor will help client to save time and costs connected to handling and

administrating the receivables, and to be able to concentrate fully on your core business

or sales activity.

Factor regularly provide clients with checklists of important data, so that client have a

complete overview of the purchased receivables, repayments of debtors, and other

information important for client.

Administration is exactly the feature of factoring that differentiates factoring from other

forms of receivable financing (forfaiting, the discount purchase of receivables or specific-

purpose financing)

COSTS INVOVLED IN FACTORING

The cost of a factoring transaction is determined by three criteria. First, the credit

worthiness of your customers. Second, the length of time that your invoices take to get

paid. Lastly, the monthly factored volume.

Your cost, actually called a discount, can be as low as 1.5% or as high as 12% per

transaction depending on how you fit the previous criteria

Factoring fee:

A factoring fee is a fee for the expenses related to the administration of the

processing of assigned receivables. The fee is stipulated by a percentage rate, as a

one-off fee from the amount of the assigned receivables, depending, in particular,

on the demands for processing and the scope of the services.

Interest rate:

Interest is applied to the advance payments paid for the assigned receivables; the

interest rates are at the level of rates on short-term bank loans.

Fee for the execution and processing of contractual documentation.

PARTIES INVOVLED IN FACTORING

Seller of the product or service who originates the invoice.

Debtor is the customer of the seller (i.e. the recipient of the invoice for services

rendered who promises to pay the balance within the agreed payment terms).

Factor (the factoring company).

HOW DOES INVOICE FACTORING WORKS?

Invoice factoring is very simple:

1. you generate invoices for your products or services.

2. You submit the invoices to your clients and to the factoring company.

3. The factoring company advances you up to 85% of the gross value of your invoices

(the remaining is kept as a reserve to offset disputes).

4. Once the invoice is paid by your client, the factoring company releases the 15%

reserve and charges their fee. Factoring is best described with an example:

1. let’s say that you sell services to Company A and Company B. As soon as you provide

the services, you invoice them.

2. At the same time, you send copies of the invoices to the factoring company, who buys

them and provides you with an advance payment for them.

3. The factoring company waits to get paid by your customers. Once paid, any remaining

funds are remitted to your company.

The invoice factoring process can be repeated every time you invoice, providing you with

a flexible line of financing that grows with your business.

The agreement between the Client and the factor specifies the factoring procedure.

Usually the client sends the customer’s order to the factor for evaluating the

customer’s creditworthiness and approval. Once the factor is satisfied about the

customer’s creditworthiness and agrees to buy receivables, the firm dispatches goods

to the customer. The customer will be informed that his account has been sold to the

factor, and he is instructed to make payment directly to the factor. To perform his

functions of credit evaluation and collection for a large number of clients, a factor

may maintain a credit department with specialized staff. Once the factor has

purchased a firm’s receivables and agrees to own them.

The following is an example of how factoring works. Actual rates will vary based upon

the nature of the advance size and the customers.

1. Factor will complete its due diligence on the client and the customers

2. Factor and the client will enter into a Factoring and Security Agreement, as well

as some additional documentation.

3. Factor will notify the customers of the change of address for remittance of

payments.

4. The client will submit an advance request for $10,000 to MP Star along with the

invoices, the supporting documentation and assignment.

5. The factor will verify the advance to ensure that the invoices are complete and

that the accounts receivable are due and payable.

6. Factor will multiply the advance request of $10,000 times the advance rate of

80% or $8,000 and subtract the initial fee of 3.5% or $350 for a total funding to

the client of $7,650.

7. The invoices are then mailed to the customers.

8. When the customer sends payment to the lockbox in 30 days.

9. The factor will take from the payment the amount advanced and the initial fee.

The factor would then remit to the client the balance left over when the reserve

settlement is released.

In this example using an advance rate of 80% and an initial fee of 3.5% for an initial fee

period of thirty days the factor will advance 80% of the $10,000 advance request or

$8,000 less the initial fee of 3.5% or $350 for a total advance of $7,650 to the client.

In this case that would be $10,000 -- $7,650 -- $350 = $2,000

To extent that some invoices are not paid in thirty days, then additional late fees are

charged on only the invoices unpaid for each late fee period that an invoice is

outstanding.

FACTORING STRATEGIES

When more flexible terms factoring begins, the client can increase prices to its customers

by 1% to 5% to help cover the cost of factoring.

In many industries, customers expect to pay a few percentage points higher to get flexible

sales terms. A client can seek a cash discount from a supplier in return for prompt

payment, much time from 2% up to 10% (depending on the industry standard). When a

client makes cash payment on the day of purchase from suppliers, the client can profit

from a large cash discount.

With benefits availing to both the supplier and the customer, the cost of factoring can be

covered by using smart factoring strategies.

[A] When to use Factoring?

If any of the following two statements are true, then accounts receivable factoring should

benefit the company.

1. Company cannot afford to wait 30 to 60 days to get paid by customers. If the

company’s biggest problem is that company need money sooner than the usual 30 to 60

days it takes for the clients to pay, then factoring is the ideal product for the company. A

factoring company can eliminate the wait and make company’s cash flow predictable.

2. Company needs money to pay suppliers or employees. Companies that need money

to pay for ongoing expenses, such as employees or suppliers, can really benefit from

invoice financing. Invoice financing will streamline cash flow and help to meet ongoing

obligations. However, companies that need the funds to purchase equipment or to buy

real estate will usually not benefit much from factoring. There are other products in the

market that will be better.

Invoice financing is a great tool that can help make payments predictable. This allows the

company to plan for growth and enables to capitalize on new and exciting growth

opportunities.

Factoring is mostly used by large, established corporations that solve – in a long-term

perspective – the issue of the daily administration of their receivables and flexibility of

financing through factoring. Factoring is also used by companies with a high growth

potential which are going through a certain restructuring phase or companies which face

substantial seasonal fluctuations of production. Furthermore, we are addressed by small-

and medium-sized enterprises, as well as suppliers of multi-national retail chains who

determine the payment and price conditions for their suppliers.

[B] Is factoring fit for the business?

Products are quick-turnover products

Products are delivered regularly to a large number of buyers

Buyers have been requested to provide with deferred maturity

There is no ownership, economic or personal connection between the business &

the buyer

The business is a manufacturing or trade company or a company delivering services

The business is engaged in automotive, wood products, the textile or food industries,

manufacture machines and equipment, electrical appliances, furniture, etc.

Parameters for receivables:

They arise from a business contract based on the supplies of goods or delivery of

services,

Their maturity is between 30 and 120 days,

They are before maturity,

They are free of any rights or claims of third parties,

Their assignment is not limited (e.g. pursuant to a business agreement),

Prepayment invoices are not concerned,

They are payable and enforceable in the amount and currency specified on the invoice,

They may not be set off against the buyer’s receivables,

The annual volume of receivables suitable for assignment will be at least CZK 30

million.

Factoring, a better option than business loan

Many business owners who need financing start their financing search by looking for a

business loan or a business line of credit. Although business loans and lines of

credit are well known products, they are very hard to get. And in reality, few business

owners actually manage to get them.

In certain instances, Invoice factoring may be a better and easier to obtain alternative.

There are three conditions that can determine whether factoring is a better alternative

than a business loan:

1. Are the clients’ slow payments hurting the growth? Do they take up to 60 days to pay?

2. Is company turning away bigger sales because company lacks working capital?

3. With the right financing, does the business have significant growth potential?

If the answer is yes to these questions, then chances are that factoring the invoices will be

better for than more traditional business financing products. Invoice factoring provides

company with financing based on its invoices, eliminating slow payment cycles and

providing it with money to pay rent, meet payroll and expand its business.

Since factoring is tied to the sales potential, it does not have the arbitrary use limits that

business loans have. The more the business grows, the more financing the company

qualify for. This makes it an ideal product for businesses that have significant growth

potential.

Factoring (or receivable factoring as it is also known) is easy to use. Once company

have invoiced the customers company send a copy of the invoice to the factoring

company. The factoring company, in turn, advances the company up to 90% of their

invoice and waits to be paid by their client. Once its clients pay for the invoice, the

transaction is settled.

In effect, by financing the invoices company eliminate the slow payment problem.

Company accelerates its cash flow, enabling itself to pay for its obligations, take new

opportunities and grow its company.

In terms of cost, factoring is a very competitive product. Factoring fees range from 1.5%

to 3% per month, making it an affordable product.

[C] Selecting the Right Invoice Factoring Company: -

Selecting the right factoring company for the company can be a very complex task.

Given the importance of the factoring relationship to the company’s ability to succeed

and grow, it is critical that company does the proper due diligence when selecting a

factoring partner. Here is a list of some of the criteria that are important when selecting a

factoring financing company:

· Factors’ Comfort Zone:

Almost every factoring company will advertise that they can work with an account that

requires as little as $10,000 per month and as high as a few million dollars per month.

Although that may be true in principle, the reality is that managing a small volume

account is very different from managing a multimillion dollar account. Most factors tend

to develop a comfort zone or “preferred specialty” when it comes to client size. When

selecting a factor, always ask about the size of their typical client. Ideally, the size of the

business should not be significantly below or above that figure.

· Monthly Minimums:

Most factors will only take clients that commit to transact a minimum financing volume

every month. The advantage of committing to monthly minimums is that the factor will

offer the company better terms. The main disadvantage is that if the factored volume

drops, your company could be liable for making up the difference in fees. When selecting

a factor, be sure to select one whose minimums are well below the expected minimums,

or better yet, try and find a factor with no minimums.

· Recourse vs. Non Recourse:

Recourse is a term that defines the ability of a factor to resell the invoices back to a client

if an invoice does not get paid within a given period of time. Most factoring companies

prefer to operate in recourse mode. However, there are a number of factors who offer

non-recourse agreements. Under a non-recourse agreement, the factor will absorb the

losses on an invoice if the account debtor becomes financially insolvent or bankrupt. In

effect, non-recourse factors offer some protection against bad debt. Although generally

better with a non-recourse factor, most recourse agreements work well enough.

· Contract Duration:

Typically, receivable factoring contracts require a minimum term of one year or more.

Whereas longer-term contracts enable a factor to offer you better pricing, they can also

lock your company into a factoring arrangement that outlives its usefulness. Your best bet

is to try and find a factor that will allow you to easily terminate a contract (giving

reasonable notice) once the service has outlived its usefulness.

· Fee Structure:

Accounts receivable factoring fees vary significantly across the industry and are usually

dependent on

a) The financial strength of your customers

b) your monthly volumes

c) the duration of your contract and

d) the payment cycle of your receivables.

The fee (also known as “discount”) can be close to 3% per month for small ticket deals

(less than $30K per month) to as low as a 1.5% for companies that wish to factor several

hundred thousand of dollars. Also, be sure to understand your factors fee structure

thoroughly before signing the agreement as some factors have complex fee structures.

· Level of Service:

A very important criterion when selecting an invoice factoring company is choosing a

company that will give you the appropriate level of service. The industry is very diverse,

and there are many factors that charge very low fees and provide a very impersonal

“mass approach” to service. Conversely, there are factors that provide a “high touch”

level of service, for slightly higher rates. Most companies tend to choose the factor with

the lowest rates (and usually lowest level of service) thinking that they will save money.

In the long run, they end up regretting the decision. You are usually better off looking for

a factor that offers a better service, even if it comes at a slight premium.

Should company work with a factoring broker/consultant?

One way to simplify the process of selecting a factor is to work with a factoring broker. A

good broker will help the company determine if factoring is the best solution for the

company and will help it find the factor that is best suited to serve it. The broker will also

help the company position its company to a factor in the best possible way, maximizing

the chances of getting the funds, the company needs, with the best possible terms. One of

the most significant advantages of working with a factoring broker is that they will help

the company by saving time. The process of evaluating a factoring company can be both

tedious and time consuming. A broker can help sidestep the issue since they will do all

the work of finding the best factor for the company. Lastly, most factoring brokers are

compensated through a finder fee by the factoring company, so company will not have to

pay them any fees for their service.

METHODOLOGY

METHODOLOGY

The study is based on personal decision, interview schedules, documentary observation; the

data has been collected from the executives of the organization and through the published

sources.

RESEARCH

The research work is restricted only to the BEETEL DISTRIBUTION SYSTEM with UTI

BANK and NEW INDIA INSURANCE COMPANY. The study is based on the outcomes of

personal interviews and documentary observation. But the extreme care has been taken to

involve the constructive suggestion from the executives. The success of research basically

depends upon the method, which is adopted to solve the research problem i.e.

a) To collect desired information and data in a systematic manner.

b) Appropriate selection of method is necessary.

The first & foremost step in any research procedure is:-

STEP 1: Problem Formulation

It is a very important step which has to be understood properly and clearly on which the

study is based because it tells the scope of the study and it should not go beyond it nor should

execute some irrelevant aspect. In this case the study is based on FACTORING system

adopted by BEETEL for the distribution business of MOTOROLA handsets.

STEP 2: Objectives of the Study

After the problem formulation the objectives should be clear through which specific type of

information can be collected. The objective of this is to study about the concept of Factoring

used in distribution business.

STEP3: Determine source data

The third step includes the collection of data, which is from the source i.e. primary secondary

data. After the collection of data, it should be organized and analyzed to check whether the

objectives are fulfilled or not.

After analyzing the data investigation of research had worked out with the help of following

steps:

Research design

Tools & techniques

RESEARCH DESIGN:

A research is an arrangement of conditions for the collection & analysis of data in a manner

that aims the research purpose and achievements of goal with economy in procedure

depending on research problem. The study of Factoring is generally based on documentary

evidences.

TOOLS AND TECHNIQUES:

In order to conduct the study the following methods were adopted.

1. Personal Discussion: They are certain information related to the subject who is

known employees of the office so through connecting the employees and executives

the information is gathered.

2. Direct Personal Interviews: The investigator personally approaches to the

person and asks them to furnish information, which is of material input for the

enquiry. Therefore these ideas, suggestions views are collected on the topic through

interview.

3. Documentary observation: The investigator consulted the secondary sources

like books, unpublished material from library, internet and the area office.

COLLECTION OF DATA

Primary data: are those that are collected for the first time by the investigator and the

primary data used ad collected for this study are:-

Direct Personal Interview

Indirect Oral Investigation

Secondary data: are not collected but obtained from the published and unpublished

sources and the secondary data collected for this study are:-

Published data through newspapers, magazines, research institutes, journals and

books.

Unpublished data through scholars, libraries, area office.

FACTORING

OPERATIONS

&

CREDIT CONTROL

IN BEETEL

PARTIES INVOVLED IN THE FACTORING PROCESS

USED BY ‘BEETEL’ FOR THE DISTRIBUTION OF

‘MOTOROLA’ HANDSETS

Bharti Teletech Ltd. – Company (Insured).

Town Distributors (TD) – Buyer.

UTI Bank- Factor.

The New India Assurance Co. Ltd. & at radius - Credit Insurance

company.

BEETEL AND THE TOWN DISTRIBUTORS (TD’S)

Bharti Teletech Ltd (BTTL) is an existing established Company engaged in the

manufacture and trade, including export, of a large range of telecommunication

equipments/products and spare parts and accessories thereof and is appointed as a

distributor by M/s. Motorola India Pvt. Ltd., (MOTOROLA) to distribute in India its

products.

BTTL has therefore appoints various Town Distributors (TD) for the sales and

distribution of the Motorola products in India. The Town Distributor has the necessary

expertise and the experience in the sale and distribution of the Products. The TD’s are

appointed for some specific territory and as the volume of business grows BTTL appoints

new TD’s to grab the growing market.

Master Agreement on BTTL letter head duly signed by Regional Credit Controller, copy

shall be accepted and signed by the Authorised signatory of TD; BTTL Regional Office

will further pass on a copy to the UTI Bank and HO. The following documents are

collected from TD before their registration-

Registration form duly filled by the distributor

Copy of TIN. NO

Copy of the IT pan Number

Copy of the Memorandum and article of association in case of Pvt or Ltd company,

copy of the partnership deed in case of partnership firm

Four blank cheques in the name of Bharti Teletech Ltd

Agreement copy duly signed by TD.

Last three months bank statement.

A letter containing the list of all the authorized signatories who sign the purchase

order.

Copy of last three year audited balance sheet and P/L account including any

provisional financial for the current year.

Certificate of net worth or personal balance sheet of proprietor/all partner (certified

by a chartered accountant).

BTTL PROVIDE INTEREST BEARING CREDIT FOR 30 DAYS FROM THE DATE OF INVOICE TO

ALL ELIGIBLE BUYERS FOR THE MOTOROLA PRODUCTS AND SERVICES.

To compensate the charges for interest for the period up to 15 days to the BUYER, BTTL

give cash discount of 0.5% on the total invoice value by way of incentive on the Body of

Invoice.

Interest charged by the Bank for the credit period enjoyed, Buyer will have to pay Interest as

per the rates applicable from time to time.

All this helps in smooth functioning for the accounts for the town distributor as every

transaction can be reconciled with the bank statements.

BEETEL AND THE NEW INDIA INSURANCE CO.

BTTL has taken credit insurance from The New India Assurance Co. Ltd. The

insurance policy is taken on a turnover for Rs1500 cr at premium of 0.11% on the

insurable turnover. The percentage for which the claim is reimbursed is 90% subject to

condition mentioned in the annexure attached.

In most of the cases the sales (invoice) of BTTL are covered under the credit insurance

policy.

According to New India Assurance Co. Ltd the Town Distributor is a person or legal

entity who is legally liable to pay the BTTL for the goods delivered/services provided

and:

BTTL collected information on the financials of Town Distributors, the various

documents which are verified and assessed regarding its credit assessment form, financial

of the last three years, and net worth certificate. On the basis of this BTTL credit control

officers assess the credit limit for the TD and send the recommendation to New India

Assurance determine the credit limit of the TD on the basis of its assessment.

Thereafter New India Assurance Co. Ltd shall review, set and endorse the Credit

Limit on basis of documents provided by BTTL along with recommendations of

BTTL’s Credit Controllers.

The BTTL declare all Insurable Turnover pertaining to the preceding month for all the

TD’s. All this information has to reach the policy issuing office on or before the 15th day

of each calendar month.

If no sale has been made during a month, a ‘nil’ declaration shall nevertheless be

submitted to the Insurance Company. BTTL also declare details of the Whole Turnover

every quarter in the form prescribed by the Insurance Company, so as to reach the policy

issuing office within 15 days of the end of the quarter.

BTTL has to submit its sales conditions to New India Assurance Co. Ltd for approval.

The New India Assurance Co. Ltd. may require changes and/or the insertion of any

clause that the Company deems useful. Any change in the BTTL general sales conditions

must be submitted to The New India Assurance Co. Ltd. for approval.

BTTL has to furnish to The New India Assurance Co. Ltd. promptly, any further

information that the Insurance Company may from time to time require, in respect of

sales made during the policy period.

Maximum period of credit of 30 days which BTTL grant to any TD (at or prior to the

original due date of payment) beyond the original due date with the prior written approval

of New India Assurance Co. Ltd.

If the payment is not given by the TD with in 30 days then BTTL initiate for recovery

with TD and if the recovery doesn’t make in next 6o days from the date of Due Date then

BTTL go for file the provisional claim to New India Assurance and in the mean time the

further billing of that particular default TD is stopped by BTTL.

OBLIGATIONS/RESPONSIBILITIES OF THE

‘BEETEL’ UNDER THE AGREEMENT:-

[A] Payment of premium and charges:

The insured shall pay in full, on or before the commencement of the policy period,

the provisional premium and other charges set out in the Schedule. The provisional

premium is subject to adjustment as mentioned herein below.

The Insured shall be liable to pay any additional premium, on the actual turnover to

which this policy applies (i.e., the Insurable Turnover) and that may become due

and payable after adjustment of the provisional premium referred to herein above

while submitting the relevant declaration of turnover as per clause 6B mentioned

below.

If at the expiry of the policy, the Insurable turnover falls short of the estimated

turnover, refund of premium may be allowed for the difference subject to the

Company retaining a minimum of 50% of the provisional premium.

The insured shall also pay all stamp duty or similar Government charges or taxes, all

bank collection and transfer charges and debt recovery charges if applicable.

The Insured shall not offset any amount owed to the Insured by the Company against

any amount owed by the Insured to the Company unless otherwise agreed by the

Company in writing.

If during the validity of the policy, the Insured agrees to grant longer payment terms

than that mentioned in the proposal form/schedule to the policy, the Company

reserves the right to revise the premium rate applicable to the relevant turnover.

[B] Turnover Declaration:

The Insured shall also declare all Insurable Turnover pertaining to the preceding month,

buyer-wise, so as to reach the policy issuing office on or before the 15 th day of each calendar

month, in the form agreed by the Company. If no sale has been made during a month, a ‘nil’

declaration shall nevertheless be submitted to the Company. The Insured shall also declare

details of the Whole Turnover every quarter in the form prescribed by the Company, so as

to reach the policy issuing office within 15 days of the end of the quarter.

[C] Declaration of overdue payments:

BTTL has to declare to New India Assurance Co. Ltd, on or before the 15th of every

calendar month, all invoices which remain wholly or partially unpaid for more than 60

days from the due date of payment, in respect of the sales made during the policy period

and such declarations shall continue to be made to New India Assurance Co. Ltd even

after the expiry of the policy period, so long as any such payment remains unpaid.

[D] Management of credit limit for the individual TD’S:

Following heads are covered under this agreement:

[1] Application:

Application for Credit limits in respect of each buyer has to be made to the Company in the

prescribed format. The Company will inform the Insured in writing about its decision:

i. To accept/refuse the Credit limit requested for any buyer.

ii. About the amount of Credit limit sanctioned for each buyer and the period of cover.

The Insured must furnish details of buyers who have consistently paid late (i.e. more than 30

days after the due date) in the last 12 months and any other information, which may affect the

decision of the Company to grant cover.

Application for extension of cover in respect of any Approved Buyer should be made one

month before the expiry of the period of cover. In such cases, the cover for the buyer will be

maintained until the NEW INDIA INSURANCE COMPANY refuses/reduces cover for the

buyer, in writing.

[2] Operation:

The Credit limit decision will take effect from the date of commencement of the policy if the

application for the limit is received within one month of commencement of the policy. For all

other applications, the limit will be effective from the date mentioned in the credit limit

decision.

The Credit limit is a revolving limit and will become automatically available to cover

further sales as payments are received against outstanding invoices.

The revolving limit will however cease to operate under the following circumstances:

(I) Where there is already due from the Approved buyer a debt older than 60 days.

(ii) When the credit limit for the Approved buyer has been cancelled.

[3] Cancellation of the credit limit of the TD:

The NEW INDIA INSURANCE COMPANY may reduce, cancel or suspend limits for any

TD at any time without assigning any reason. Such decisions will be conveyed to the BTTL

writing. However, all Insured Debts existing at the time of conveying the decision shall

stand covered.

The Credit limit shall stand automatically cancelled under the following circumstances:

When a provisional claim is filed/ should have been filed under the policy.

When the Approved buyer becomes insolvent.

When a credit limit has been refused. A total refusal is equivalent to a cancellation of

credit limit. In such cases where the credit limit has been cancelled/refused, including

automatic cancellation, the BTTL must reapply for credit limits if at a later date he

wishes to continue selling to this TD.

[E] The TD will become insolvent in the following mentioned

situations-

[1] INSOLVENCY – of the approved buyer – The buyer shall deemed to be

insolvent for purpose of this policy when

The buyer is declared bankrupt from the competent court of jurisdiction.

OR

A Receiver/Administrator/Liquidator has been appointed by the Court to manage his

estate.

OR

An order by the Competent Authority has been made for compulsory winding up.

OR

An effective resolution has been passed for voluntary winding up provided that this

resolution is not merely for the purpose of reconstruction or amalgamation.

OR

an arrangement binding on all creditors has been sanctioned by the appropriate Court

OR

Such and other relevant conditions exist as are in the opinion of the Company

substantially equivalent in effect to any of the foregoing conditions.

The loss shall be confirmed by the relevant authority (such as Court, Liquidator, Receiver,

Administrator) as being owed by the Approved Buyer to the Insured at the date of

insolvency.

[2] PRESUMED INSOLVENCY OR PROTRACTED DEFAULT - by the Approved - Buyer

is the failure of the Approved Buyer to pay to the BTTL, at the end of the waiting period,

the whole or part of the Insured debt relating to the goods/ services delivered to and

accepted by an Approved Buyer.

[F] Procedure for grant of Discretionary Limit:

According to agreement between the BTTL & THE NEW INDIA INSURANCE

COMPANY Where the Credit Limit required on a buyer is less than or equal to the

Discretionary Limit mentioned in the Schedule, the NEW INDIA INSURANCE

COMPANY LTD. may set a Credit Limit without reference to the BTTL, which shall be

justified by either:

i. A written report from an independent credit agency dated not more than 12 months

before the date of the oldest outstanding invoice, which supports the amount of credit

given. If the report speaks for a lesser amount, then the NEW INDIA INSURANCE

COMPANY shall be liable to pay only the Insured Percentage of that amount.

ii. A written report from the buyer’s Bankers dated not more than 12 months before the

oldest outstanding invoice which supports a figure at least twice the amount of credit

given. If the reference speaks for a smaller figure, then the NEW INDIA INSURANCE

COMPANY shall be liable for the Insured Percentage of half the amount spoken for.

iii. Good trading experience obtained within a 12month period preceding the

establishment of an Insured Debt. The Credit limit given should not exceed 125% of

the maximum outstanding debt recorded with the Insured and satisfactorily paid. Good

trading experience is where each month the buyer pays no later than 30 days after the due

date for payment, subject to the payment of a minimum of three invoices within the due

date of payment.

[G] Credit Control:

i. The Insured must strictly follow the credit control procedures that are endorsed in

writing to the policy, or if none, those that are detailed in the proposal form. Proof

of this shall be submitted to the Company at the time of making of claim under the

Discretionary Limit.

ii. The Insured shall not make any settlement, arrangement or compromise for an Insured

Debt unless a written agreement to this effect is obtained from the Company.

iii. The Insured hereby agrees to monitor the payment performance of all Approved

Buyers by keeping an age-wise receivables record of all amounts due and all buyer

exposures against individual Credit Limits sanctioned/established and take all

reasonable measures to recover the Insured Debts. The Insured hereby agrees to

prevent any loss arising and should any loss arise, minimize it.

iv. The Insured shall act in good faith and promptly inform the Company about any

changes that they may become aware of in their or their buyer’s circumstances,

including:

Any idea or reason to believe that the buyer might not pay its debts.

Where other suppliers stop delivering to a buyer because their payment record is poor

(or they have concerns about the buyer’s solvency)

If a buyer asks for extra time to settle a debt or to pay by installments.

If the buyer asks to extend the term of the bill of exchange

When a buyer’s draft or bill of exchange or cheque is not paid on the date it is due or

presented (regardless of late payment).

If the Insured desires to start proceedings or action against a buyer.

When a debt is partially or wholly unpaid beyond 60 days

[H] Stop Cover:

Cover for new deliveries shall be stopped in circumstances where:

A payment due from a buyer is unpaid for more than 60 days (whether the payment is

insured or not).

The BTTL has received notice from a responsible source that a default is likely to

occur in respect of an existing or future outstanding payments.

When the NEW INDIA INSURANCE COMPANY notifies the BTTL of stopping

cover.

When the credit limit for the buyer is cancelled as detailed in clause 6G of the Policy.

When a cheque/bill has not been honored at maturity or where cheques have been

returned unpaid.

When legal proceedings have been instituted against the buyer for

insolvency/default in payments.

[I] Claim Procedure in case of default made by the TD:

BTTL has to

Give prompt notice to New India Assurance Co. Ltd in writing upon the

occurrence of a default/delay in payment or the discovery of any event or

circumstance likely to give rise to a claim under this policy.

Give prompt notice in writing to New India Assurance Co. Ltd if any amount

becomes overdue by a period equal to the Maximum Extension Period ( egg- 7days

or 15 days or 30days) from the original due date. If With in 60 days from the date

of its discovery BTTL does not inform New India Assurance Co. Ltd then the

claim amount will not remain liability under this policy.

Ensure that all rights in respect of the contract of sale and the Insured Debt are

properly preserved and exercised.

If required by the New India Assurance Co. Ltd, take any measures that may be

required including the institution of legal proceedings.

Within 90 days of the due date of the first unpaid invoice, BTTL has to submit a

Provisional claim as follows:

Submit a filled in claim form as prescribed by New India Assurance Co. Ltd.

BTTL shall also submit support documents such as proof of non-receipt of

payment and quantum of payment due, proof of delivery such as invoice/LR etc.

and such other documents to establish proof of actual sale. All documents shall

be duly certified by a competent Chartered Accountant.

In the case of an insolvency claim, the BTTL shall submit a duly filled in claim

form within 5 days of becoming aware of the event. BTTL shall submit

confirmation of debt from the liquidator, trustee in case of bankruptcy, or other

authorized agent, to receive payments.

[J] Recovery Procedure:

Recoveries consist of any amount received by BTTL from TD or from any other source

whatsoever towards the payment of the Insured Debt.

All recoveries received by and on behalf of the Insured in respect of any debt of the buyer

to the Insured shall be treated as recoveries hereunder regardless of any designation as to

the application of funds or source from which such payments are received and shall be

applied chronologically against the outstanding Insured Debt in order of the due dates.

(Or extended due dates where applicable).

BTTL take all steps that are necessary and expedient which New India Assurance Co.

Ltd, may at any time require, to effect recoveries, whether from TD or from any other

person from whom such recoveries have to be made.

[K] Misstatement:

According to the agreement this policy shall be void ab initio, and all the premiums paid

hereon shall be forfeited to the BTTL, in the event of any misstatement or non-disclosure of

any material fact/information. Without prejudice to any rule of law, it is declared that this

Policy is given on the condition that the BTTL has at the date of issue of the Policy

disclosed and will at all times during the operation of this Policy promptly disclose all facts

in any way affecting the risks Insured.

[L] Cancellation of the agreement:

According to the entered the NEW INDIA INSURANCE COMPANY any may at any time

cancel this policy by sending the BTTL 30 day’s notice by registered letter at the BTTL’S

last known address. The NEW INDIA INSURANCE COMPANY shall however remain

liable for any loss/ claim in respect of sales transactions made to Approved Buyers prior to

the date of cancellation.

If, at the time of cancellation of the policy, the Insurable Turnover falls short of the annual

estimated turnover, refund of premium shall be made for the difference, subject to a

minimum retention of 50% of the Provisional Premium.

This Policy shall stand cancelled automatically on the insolvency of the BTTL. In this event,

the NEW INDIA INSURANCE COMPANY shall be entitled to retain all premiums paid,

and receive and retain all premiums due and payable up to and including the effective date of

such insolvency.

BETEL AND THE UTI BANK

BTTL, engaged in the business of manufacturing and marketing of wide range of

Telephones and marketing & distribution of GSM Phones, DSL Modems & other allied

Broadband products and set top boxes and supplies the same to the sales channel

intermediaries, corporate, institutions etc., has approached the bank and bank has agreed

to purchase receivables from its buyers, without RECOURSE to BTTL. Considering the

business interest of both the parties it has been agreed to enter into an agreement to sell

and purchase the receivables and to specify their respective roles in the scheme and On

October 9, 2006 BTTL and the UTI BANK entered into the factoring agreement.

According to this agreement, UTI bank will purchase the receivables of the approved

buyer of the BTTL, not more than 21 days old, and charge 9.25% interest p.a. at the and

of every calendar month by BTTL/BUYER for the credit period i.e. from the date of

payment by the bank till the due date of payment by the approved buyer.

PROCEDURE THAT BOTH THE COMPANIES FOLLOWS

FOR THE FACTORING BUSINESS:-

BTTL will raise the invoice on its buyers and shall hold the accepted invoice, LR

and other relevant documents, title and interest as the trustee of the bank in trust

in accordance with the terms of this agreement. BTTL will send all the relevant

documents to the bank within 5 days from the date of demand by the bank. In case

of non receipt of the above documents, bank retains the right to claim the amount

of the invoice from the BTTL provided that payment is not received from the

debtor.

BTTL shall mail all the details of the invoices raised on the buyer to the bank.

After the verification of the details of the invoices, bank will purchase the

receivables of the BTTL and will issue a pay order in the favors of BHARTI

TELETECH LTD. on the same working day. The pay order will be issued net of

interest.

All payment against the invoices purchased by the bank shall be made at agreed

centers. BTTL shall request the buyers accordingly.

Responsibility of collecting the payment from the buyer and depositing the same

in the bank shall be on the bank alone.

Each party shall bear their respective expenses in connection with the agreement.

The agreement can be terminated by either party, upon completion of one year

from the date above mentioned, after giving a three months (3 months) notice in

writing to the other party.

If any of the party to the agreement does not perform its duty under this

agreement, other party may choose to terminate the agreement, if the same is not

ratified/ set right within 30 days of being intimated.

The agreement can be terminated by one party if the other party is declared

bankrupt by the court of law.

PROCEDURE FOLLOWED BY THE BEETEL FOR

THE FACTORING BUSINESS

MOTOROLA business is growing at a very fast pace in India and BTTL, being the national

distributor of MOTOROLA products in India, is making major portion of their profits from

the MOTOROLA business.

BTTL is carrying its distribution business of MOTOROLA products with the help of the

Town Distributors. To inline with the distribution business of BTTL, Town Distributors have

to maintain the huge stocks of the MOTOROLA products. So in order to help their Town

Distributors and to solve their liquidity problems, BTTL has arranged for the FACTORING

services with the UTI BANK. Through this factoring service BTTL has arranged for

providing 30 days credit on the MOTOROLA products for it’s Town Distributors though

BTTL is not getting even a single day credit on the products from the MOTOROLA

Company.

BTTL approaches to the TDs for carrying the MOTOROLA business. BTTL makes TD’S

after verifying the financial strength of the individual or the partnership firm or the company.

A unique registration number is allotted to every TD after their registration with the BTTL

subject to reception of all the required documents.

Regional sales manager of the MOTOROLA works in coordination with the Town

Distributors. Whenever a TD asks for the credit limit for doing the MOTOROLA business,

Regional sales manager collects all the prescribed documents and the form from the Town

Distributors and sends all these documents to the regional credit controller of the BTTL.

Then the regional credit controller of the BTTL assesses the financial records of the TD

thoroughly and decides a feasible credit limit for the TD according to the credit worthiness as

shown by his financial reports.

BTTL sends all the documents collected from the TD, for the said credit limit, along with the

suggested credit limit to the NEW INDIA INSURANCE CO. LTD for its approval, as the

company has got its TD’S insured with the same. After receiving all the documents and a

through examination and assessment of the same, NEW INDIA INSURANCE CO. LTD

determines the credit limit of the TD. This credit can be same or over or below the credit

limit as suggested by the BTTL’S credit control manager.

The NEW INDIA INSURANCE CO sends an endorsement letter to the UTI BANK & BTTL

regarding limit set by the company for the TD.

After receiving the endorsement letter UTI BANK makes its own assessment of the credit

limit and sets its own credit limit for the TD. Once the endorsement letter is received UTI

BANK opens an account for TD. TD’S are provided with the unique ID code with the UTI

BANK.

There can be difference between the credit limit set by the two i.e. UTI BANK and THE

NEW INDIA INSURANCE COMPANY LIMITED but the limit set by the UTI BANK is

applicable on the all the transactions between the UTI BANK and BTTL related to purchase

of the invoices. If the BTTL follows the credit limit set by the NEW INDIA INSURANCE

COMPANY LIMITED then BTTL have to bear the 10% risk over the invoices purchased by

the UTI BANK.

Now whenever a purchase order is received from a particular TD, it is verified against the

credit limit sanctioned and the credit limit utilized by the TD. BTTL receives current

applicable credit limit for every approved buyer from the UTI BANK on the daily basis. The

current limit will be determined by considering:-

i. All invoices raised during the previous day after 1600 hours and invoices

raised during the day before 1600 hrs.

ii. All cleared Cheque s/Payments on same day before 1600.

After verifying the current applicable credit limit of the TD, BTTL dispatches the required

material and issuer invoice for the calculated amount, for the goods dispatched, in the mane

of the TD and get it signed form the authorized signatory of the TD. BTTL retains a copy of

the invoice issued against the TD as per the agreement with the UTI BANK.

BTTL then sends all the details of the invoice to the UTI BANK via mail. UTI BANK, on the

reception of the details, issues a pay order net of interest in favor of BTTL for the invoice

amount in its IDBI Bank account on the same working day, of the invoice date. In this course

UTI became the owner of the goods dispatched to the TD till data the TD make payment for

the same to the UTI BANK with in 30 days of the date of purchase of invoice.

TD’S have to make payment to the UTI bank at their agreed centers. All the TD’S operate

through specific accounts with the UTI BANK.

UTI BANKS sends a report on the payment pending against the TD’s to the BTTL, on the

daily basis. The credit controller of the BTTL goes through these reports and follows up with

the TD’s for the pending payments by them to UTI Bank.

FINDINGS

FINDINGS AND OBSERVATIONS

Factoring services provide solution to the problem of liquidity. It can be used effectively to

produce fruitful results with the limited capital. It enables a company to carry out its

operations rather than spending time for chasing debtors. Factoring is an effective tool in the

hands of management for increasing their sales by providing credit to their customers.

Factoring helps the BTTL in generating cash for meeting their requirements without any

other additional liability as factoring is not a loan. UTI bank purchases the receivables of the

BTTL that BTTL generates against credit sales to the TDs and makes payment to the BTTL

for the same.

In short factoring benefits the BTTL in the following ways:-

[A] ACCELERATED CASH FLOW:-

UTI BANK advances BTTL cash on qualified accounts receivable immediately, so that

BTTL can take care of operating expenses, taxes and other financial obligations rather than

blocking its money in the debtors.

[B] NO NEW DEBT INCURRED:-

Because factoring is not a loan, BTTL assume no new debt or interest to pay. It merely

exchanges one asset (accounts receivable) for another asset (cash) with the UTI bank.

[C]UNLIMITED WORKING CAPITAL:-

Factoring is the only source of business financing that grows as company’s sales increase.

The more accounts receivable company generates, the more immediate cash company can

access. In this way factoring helps the BTTL in increasing its sales.

[D] NO COLLETERAL SECURITY REQUIRED:-

No Collateral Security is needed to avail finance. Company pays interest only on the actual

funds utilized. Hence BTTL is getting additional money without any colleteral security.

[E] CONCENTRATE ON ITS OWN BUSINESS:-

The more the company’s sales book grows, the more the UTI BANK helps the BTTL to turn

their invoices into cash. This will enable the BTTL to respond more quickly to market

opportunities. Collection of receivables is also managed by UTI BANK enabling BTTL to

concentrate on its own core business activities.

[F] HIGH ADVANCE:-

UTI BANK is offering the highest advance rates to the BTTL. Company is obtaining up to

90% of the face value of the invoices with the TDs.

Suggestions

&

Recommendations

SUGGESTIONS

Before entering the BTTL, Factoring was an unknown concept to me, so it was really

difficult to plan out the suggestions. But howsoever the suggestions which were planned after

studying the Factoring operations in the BTTL, and understanding the concept of Factoring

are:

Company should consider the scope of the receivables factoring on the basic and the cordless

phones that it manufactures as the factoring on the MOTOROLA handsets and the accessories is

benefiting the company a lot in its operations.

Since factoring is tied to the sales potential, it does not have the arbitrary use limits that business

loans have. The more the business grows, the more financing the company qualify for. As BTTL is

making a major a portion of their profits out of this distribution business using the factoring

services of UTI bank only, steps should be taken to increase the sales of the MOTOROLA Products

and the Accessories. Like, some kind of incentive can be given to the TD’S showing outstanding

performance in the sales of the MOTOROLA products. Other these kinds of incentives should

be introduced and increased to increase the transactions. This will increase the profits of the

BTTL.

Procedure and the documents required for the registration, of the newly established

companies/partnership firms and the businesses, as the eligible buyer or the TD should be

clarified. The list of the documents required for the registration as a TD includes the last

three year’s CA Certified balance sheets which a newly established business will not be

having.

CONCLUSION

CONCLUSION

After the analysis of the factoring business of the BEETEL it can be concluded that the

company is using the factoring services of the UTI bank very efficiently to convert their

receivables in instant cash. Under this Factoring agreement, UTI bank purchases all the

receivables of the approved buyers up to the prescribed credit limit from BTTL, without any

recourse, and credit their account with the net amount on the same day. In this way, BTTL is

able to generate constant cash flow without any additional liability and having tension for

chasing the debtors for the payment resulting in a clam situation to concentrate on its main

business. BTTL has also entered into an agreement with the NEW INDIA INSURANCE

GROUP LTD. For the insurance of the receivables and thus nullified its risk.

Because of these factoring services of the UTI bank, BEETEL’s turnover has increased

manifolds resulting into maximum returns. On the basis of whole analysis done in the

BEETEL over the factoring it can be finally said that these factoring services are benefiting

the company a lot in its operations and it should also consider the factoring for the basic and

the cordless phones that it manufactures.