factoring of accounts

8/10/2019 Factoring Of Accounts

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Presentation On

Factoring of Accounts

Receivable

By

www.Ass ignmentPoint .com

www.assignmentpoint.com



July 28, 2003Page: 2

Factoring of Account Receivables

Financing against invoices raised by the supplier

after making the delivery successfully.

• Revolving Short Term Facility

• Permanent Assignment of Payment

• Financing against invoices

• Post-delivery Financing




Page: 3

1. Client assigns the payment against delivery to IDLC

2. Client makes delivery to the Buyer against WO

3. Client submits delivery challan and bill/invoice to Buyer4. Client submits delivery challan and bill/invoice to IDLC

5. IDLC makes advances to Client against the submitted invoices

6. Buyer makes payment to IDLC

7. IDLC reimburses the balance amount

Mechanism

Mechanism

IDL

Client Buyer3

2

5

67

4

1




Page: 4

Portfolio of Customers

BUYER /

CUSTOMER

BUYER /

CUSTOMER

BUYER /

CUSTOMER

BUYER /

CUSTOMER

BUYER /

CUSTOMER

SUPPLIER /

CLIENT

• Sales Ledger Audit

• Permitted Limit for each customer

• Permitted Credit Term for each customer




Short Term Finance – Work Order Financing Page: 5

Sales Ledger Audit (SLA) Party ledgers of last one year – customer wise

We look for

Relationship since

Monthly sales Monthly collection

Deductions (%)

Sales return (%)

Net

Collection

Ave.

Monthly

Balance

Ave. Monthly Sales Ave. Monthly Receivables

Ave. Deduction

Ave. Receivable Turnover in days





1. Assignm ent of Payment

Ass ignment Letter from the Cl ient

• STF Agreement between client and IDLC

• Taking working capital financing from IDLC• Make all payments to IDLC in the following manner:

“IDLC A/C#559 (A/C: Client Name)”

• Irrevocable until further notice from IDLC

• Request for confirmation letter payment as per request



http://slidepdf.com/reader/full/factoring-of-accounts 7/25Short Term Finance – Work Order Financing Page: 7

Continued…

Ass ignment Letter from IDLC

• STF Agreement between client and IDLC

• Taking working capital financing from IDLC

• Make all payments to IDLC in the following manner:“IDLC A/C#559 (A/C: Client Name)”

• Irrevocable until further notice from IDLC

• Request for confirmation letter

payment as per request

Meeting with the customer/buyer

Receiv ing payment con f i rmat ion from the buyer




2. Delivery

The client submits invoices along with• Delivery challan

• VAT challan (if any)

The Asst. Officers/ Officers check the submitted Invoicesand Challans

Check list

3. Subm ission o f Invoices/bi l ls




3. Financing

Inv. Amount Ad. Payment %X=

= Inv. Amount Ad. Payment %Dis. Balance[ ]

•Due Invoices = Invoices outstanding till maturity (till the end of credit term)

•Overdue = Invoices outstanding beyond maturity, but not exceeding the

grace period

•Overdue Disapprove = Invoices outstanding beyond grace period

•Sales Ledger Disapprove = Sales Ledger Balance – Permitted Limit

(if SLB > Permitted Limit)

Available Fund

Current A/C BalanceX- -




4. Col lect ion agains t invoices Payment in the name of IDLC

Invoice wise payment or lump sum payment

Allocation of collected amount

Checking – AIT deduction? other deduction?

5. Reimbursement of Balance Amoun t Reimbursement amount

= Invoice amount x Balance % - New Disapprove Balance

On Line Approval (Disbursement memo)

Issuing cheque in favour of the client




Major Terms & Conditions

Credit Limit revolving limit [general and customer specific]

client requirement & SLA data

client’s forecast

Expiry – 1 year from Agreement; Renewable

Maximum Credit Term [general and customer specific]

client requirement & SLA data client’s forecast




Continued…

Service Charge (0.4%-0.7%)

calculated on the gross invoice amount

depends on bargaining power

should be enough to cover service cost

fair rate so that client retention rate is improved

realized at the point of disbursement against invoices

loaded in the loan a/c immediately after

purchasing invoices




Continued…

Factoring Discount (14.5%-15.75%)

depends on bargaining power

calculated on daily loan balance

should cover

IDLC’s cost of fund

should be fair rate so that client retention rate is

improved

realized at each month end

loaded in the loan account

Expected Effective Rate

varies from client to client

usually around 17%-18%




Book Keeping

Sales Ledger Control Account

Current Account (Loan Account)

For Client

For Each Customer




Security Mandatory

Assignment of payment (permanent assignment)

Floating charge on receivables

(filing with RJSC in case of Ltd. Company) Personal guarantee from Directors

Security cheque covering full sanctioned limit

Recourse on the client

Optional

Corporate guarantee (if necessary)

Cash security (% of sanctioned limit)

Equitable/registered mortgage on property

Any other security




Documentation Sanction letter

Loan agreement

Demand promissory note

Client promises to pay the sanctioned amount at given int. rate

Letter of revival

Acknowledges the liability for payment of promissory note

Letter of continuity

Agrees to execute DP note and other relevant documents

Undertakes to remain liable on DP note and other docs

Undertaking

Declares that they will not obtain any financing from any

person(s) and/or institution(s) against the assignment of

receivables of the client without prior consent of IDLC.




Continued…

Letter of guarantee (Joint/Several)

Extract of the Board resolution (if limited company)

Notarised Irrevocable general power of attorney

Client empowers IDLC to collect, receive, deposit, encash,

transfer the proceeds against all receivables of the clientarising out of the business transactions with their customers

Deed of floating charge on receivable

Client agrees to secure loan, amongst other means, creating a

priority floating charge on all book debts (receivables)

Form XIII duly filled up and signed by the client

Corporate guarantee (if any)

Deed of Mortgage & Undertaking (if any)

Any other documents relating to any other collateral




Marketing

Target Group

Small and medium clients

Minimum monthly turnover of Tk.1.0 million

Frequent supply to few fixed customers Considerable invoice size

Working capital crisis – growth prospect (cash purchase –

credit sale)

Customers/buyers with consistent payment performance

Suppliers with good reputation




Continued…

Current Portfolio

9

5

2

11

1

Printing &Packaging

Other Services

Transport

Construction &Engineering

Food & Beverage

Pharmaceutical

Other Manufacturing




Continued…

How to Market

Assessing the need of the prospect for working cap

Convincing the prospect that Factoring will improve cash flow

and thus will increase the business volume

Marketing the services – „follow up‟ and „reporting‟

IDLC‟s experience in this field

IDLC‟s network – makes assignment process and collection and

follow up job easier

Need basis financing – small amount and less probability to beused otherwise

Our service – prompt payment

Flexibility – limit enhancement, increasing credit terms





Continued…

No commitment fee – cab be cancelled anytime if not satisfied

Ensuring confidentiality

Package sale – advantages: security, less costly

Information Required

MEMART, Form XII, financial statements, liability positions,

corporate profile, Directors‟ profile, etc.

Complete Sales Ledger (past one year)





Problems Encountered

While marketing

What is IDLC

Reluctance to open their books (sales ledger)

Interest rate – competing with banks Competing with traditional short term credit lines like CC, OD –

hastle free

Reluctance to assign payment/ involve customers

Reluctance to pay service charge

Reluctance to provide security – only assignment of payment

Interested to take financing against bad accounts only

Reluctance to give security cheque





Continued…

During Assignment (with Buyer)

Difficult to get appointment – reluctance to meet IDLC (third

party)

What is IDLC – to customers

Does IDLC have permission for WO financing

Payment can not be assigned only to „NBFI‟

Time consuming – assignment for each WO, outside Dhaka

Policy does not permit assignment

Difficulty in obtaining confirmation letter (in case of MNCs

approval of parent company is required)





Continued…

During Financing

Does not understand the process of adjustment against

„Disapproved Bills‟

Request for financing against fresh bill even when negative

financeable amount

During Followup (with Buyer)

Reluctance to talk to IDLC people – specially in the beginning

Non-availability of contact person

Number of phone calls for a single collection

Difficulty in obtaining complete information

Contact person does not know

Does not want to disclose to us (asks the client to contact)www.assignmentpoint.com



Sh t T Fi W k O d Fi i P 25

Risks

Comparatively risk is low because of post delivery financing.

However, most commons risks are:

Direct payment – intentional / unintentional

Arrangement between buyer and seller

Fake invoices – false delivery

Forgery – short supply

End of relationship between client and customer


factoring of accounts

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