international factoring 3

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International factoring whether it is an

alternate for counter party risk management

Group 3

Abhinav Sharma

Debargha Ambuly

Deepak Sahu

Himanshu Sharma

Kalyani Mudaliar


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AgendaAgenda

Introduction

Factoring Explained

Benefits Example Case

Factoring in India

FAQs


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IntroductionIntroduction

Factoring is a financial transaction where by a business sellsits accounts receivables(i.e., invoices) to a third party(calleda factor) at a discount in exchange for immediate moneywith which to finance continued business.


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International Institute for the Unification of Private Law(Unidroit) Rome 1988 recommendedin general terms factoring as under

factoring means an arrangement between a

factor and his client which includes at least two ofthe following services to be provided by thefactor

1. Finance

2. Maintenance of accounts

3. Collection of debts

4. Protection against credit risk

INTRODUCTION


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Why a company use factoring

Factoring is used by a Firm when the available

Cash Balance held by the company is insufficientto meet current obligations and accommodate itsother cash needs, such as new orders orcontractors.


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Different Parties involved in factoring

The Buyer

The Seller

Factor


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Parties Involved in factoring

ClientCustomer

Factor

Seller Buyer

Collection

Financer

Buys

invoices


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Services offered by a Factor

Follow up and collection of Receivables from

clients

Purchase of Receivables with or withoutrecourse

Help in getting information and credit line on

customers(credit protection)

Sorting out disputes, due to his relationship

with Buyer & Seller


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Types of Factoring

1 Full Service

2 Recourse factoring

3 Invoice Discounting

4 Maturity Factoring

5 International factoring


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Benefits of International Factoring

Benefits to Exporters

Increased sales in foreign markets by offering competitive

terms of sale

Protection against credit losses on foreign customers

Accelerated cash flow through faster collections

Lower costs than the aggregate charges for L/C

transactions

Liquidity to boost working capital

Enhanced borrowing potential and an opportunity to make

use of supplier discounts


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Benefits of International Factoring

Benefits to Importers

Purchase on convenient 'open account' terms

No need to open L/C's Expanded purchasing power without blocking

existing lines of credit

Orders can be placed swiftly without incurring

delays, L/C opening charges, negotiation charges,etc.


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Example Case MAC Carpets, Egypt

Back ground of the Company

MAC Carpets is a premium exporter in Egypt Sister concern of Oriental Weavers Group which is

one of the largest private conglomerates in Egypt

90% of its production goes to 107 countries

They were dealing directly with Foreign factoringcompanies for many years to sustain their needs in

buyer markets


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Issues

2008 financial crisis Access to financesshrinked especially in USA & Canada

Risk of buyers default was increasing

Decided to explore alternative financingoptions and protect exports


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Association with EGYPT FACTORS Developed withFIM Bank, CIB & IFC

EF introduced the

benefits of dealing

with members ofFactors Chain International (FCI)

FCI One stop solution for exports to 60 countriesfor risk protection, collection & finance

Any combination can be chosen by parties concerned

MAC Carpets leveraged the services fully


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Factoring in India SBI Factors 1991, Currently holds 75% market share

Canara Bank

Foremost Factors Ltd

HSBC to provide services to SMEs over 5 Crores turnover in cities like

Mumbai, New Delhi, Kolkata, Pune, Bangalore, Chennai

Global companies like DBS, GE, Standard Chartered willing to start

operations in India

Growing Market in India

The Regulation of Factor (Assignment of Receivables) bill 2011 is expected

to set new standards & regulations for this business in India

Removal of stamp duty for non banking Factoring companies

Registration and Regulation of Factoring companies with RBI

Assignment of receivable will be noted in a central registry

Extend the law relating to recovery of debt to dues under a factoring

arrangement.


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FAQsQ.: If I use factoring, will my customers think that my financial position is

unsatisfactory?Ans.: You should not be concerned about that. Factoring has become so well

established that almost certainly your customers will already be dealing

with a factor, either by using one themselves or through other suppliers

that they have. During 2009 the total volume of business handled by

factoring companies around the world was over 1300 billion EUR.

Factoring is rapidly becoming the obvious business tool for growing

companies.

Q.: How can I be sure that you will collect the receivables promptly? After

all, the longer they are outstanding, the more interest you earn.

Ans.: Factoring is a service industry and in order to survive it must offer

excellent levels of service to clients. If we did not offer such levels of service, we would quickly lose our clients' business which would more

than offset any small gain in interest income that we would generate

through being slow to collect receivables. Secondly, we also take the risk

of non payment of receivables. It is a well known fact that the longer a

debt is outstanding the greater the chance there is that it will turn bad.We do not want to increase our risk in this way.


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FAQsQ.:

Letters of Credit will give me all I need.

Why do I need factoring?(FCI)Ans: If all of your customers and potential customers are happy to provide

L/C's, then carry on as you are. You will however find that more and more

customers are becoming less interested in buying from suppliers that insist

on L/C terms. They do not like the idea of having to commit part of their

funding to supporting purchases made in this way. There is also

considerably more administration required on their part if L/C's are used.

If you want to expand your sales into these markets you must be able to

offer more "buyer friendly" terms and that means open account or at least

D/A terms. Factoring can help you offer such terms without reducing your

security or affecting your financing.


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FAQs

Q.: The finance under a factoring contract would be very useful but is itmore expensive? (FCI)

Ans.: Factoring is a unique combination of finance and services, the costs are

therefore impossible to compare with bank finance or credit insurance

companies. The package not only includes the finance, which is priced

very competitively with bank finance, it also includes 100% credit

protection on your approved customers and a full invoice collection

service. The service fee that we charge is very reasonable when you

consider the cost of chasing payments in other countries, the cost of a bad

debt to the business and the loss of profit that might be sustained through

not being able to finance your growth.


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FAQs

Q. Do you cover the risk of customer insolvency before the goods have been

shipped? (FCI)

Ans.: It is generally not covered. The risk coverage actually takes effect from

the day the goods are shipped, the point at which an invoice can be raised.

Pre-shipment risk coverage is available from some insurers but it can bequite expensive. It is only normally used by some businesses that have a

long production time or where the products are highly specialised and

would be difficult to resell to another customer if the original customer

ceased to trade prior to the shipment of the goods.


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Reference

Factor Chain International

http://www.fci.nl/home/

SBI International Factoringhttp://www.sbiglobal.in/products/processFlow.

htm


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THANK YOU

international factoring 3

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