INTRODUCTION OF FACTORING

Factoring has a long and rich tradition, dating back 4,000 years. Almost every
civilization that valued commerce has practiced some form of factoring, including the
Romans who were the first to sell actual promissory notes at a discount. The first
widespread, documented use of factoring occurred in the American colonies before the
revolution.
With the advent of the industrial revolution, factoring became more focused on the
issue of credit, although the basic premise remained same. By assisting clients in determining
the creditworthiness of their customer and setting credit limits, factors could actually
guarantee payments for approved customers. Prior to the 1930s, factoring in this country
occurred primarily in the textile and garment industries, as the industries were direct
descendants of the colonial economy that used factoring so specifically.
As time is passing by, and we are moving into the modern era of instant
communication and a shrinking world, factoring plays an important role in the todays
business. The increasing interest rates that marked the 1980's and 1990 are led to an increase
in the number of new companies turning to the factoring business. Factoring is a way to raise
quick capital in a manner that was called "off the balance sheet" financing. Since
accounts receivables are an asset account, factoring is a way to raise quick cash without
adding the liability of loan.
Factoring is one of the oldest forms of business financing. It can be regarded as a cash
management tool for many companies like garment industry where long receivables are a part
of business cycle. Factoring is a service that covers the financing and collection of account
receivables in domestic and international trade.

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It is an ongoing arrangement between the exporter and factor. The exporter sells
invoiced receivables at a discount to the factor to raise finance for working capital
requirement. It bridges the gap between raising an invoice and getting that invoice paid. By
obtaining payment of the invoices immediately from the factor, usually up to 80 per cent of
their value the companys cash flow is improved. The factor charges service fees that vary
with interest rates in force in the money market. The factor operates by buying the invoiced
debts from the selling company. These are purchased, usually with credit control,
collection and sales accounting work. Thus the management of the company may concentrate
on production and sales and need not concern itself with non-profitable control and sales
accounting matters.
Factoring differs from a bank loan in three main ways. First, factoring differs from
traditional bank loans because the credit decision is strictly based on receivables rather than
other factors like how long the company has been in business, working capital and personal
credit score. Secondly, factoring is not a loan; it is the purchase of financial asset. Finally, a
bank loan involves two parties whereas factoring involves three-buyer, exporter and factor.
There is some misconception regarding factoring like people believe factors are a
lender of last resort but that is not true because exporters seeking out factoring are often in
the beginning stages of growth. At first glance, factoring appears to be expensive but does a
lot more; in essence, factoring replaces the accounts receivables and credit department. In the
language of international conventions on factoring, factoring is defined generally as a
contractual relationship involving (a) a Supplier of goods and services, (b) a Factor to which
the Supplier sells or assigns existing or future receivables arising from contracts of sale of
goods or services made between the Supplier and its customers (the Debtors), who are duly
notified of the factoring contract.

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HISTORY OF FACTORING

Factoring as a fact of business life was underway in England prior to 1400, and it
came to America with the Pilgrims, around 1620. It appears to be closely related to
early merchant banking activities. The latter however evolved by extension to non-trade
related financing such as sovereign debt.[31] Like all financial instruments, factoring evolved
over centuries. This was driven by changes in the organization of companies; technology,
particularly air travel and non-face to face communications technologies starting with
the telegraph, followed by the telephone and then computers. These also drove and were
driven by modifications of the common law framework in England and the United States.
Governments were latecomers to the facilitation of trade financed by factors.
English common law originally held that unless the debtor was notified, the assignment
between the seller of invoices and the factor was not valid. The Canadian Federal
Government legislation governing the assignment of moneys owed by it still reflects this
stance as does provincial government legislation modeled after it. As late as the current
century, the courts have heard arguments that without notification of the debtor the
assignment was not valid. In the United States, by 1949 the majority of state governments
had adopted a rule that the debtor did not have to be notified, thus opening up the possibility
of non-notification factoring arrangements.
Originally the industry took physical possession of the goods, provided cash advances
to the producer, financed the credit extended to the buyer and insured the credit strength of
the buyer. In England the control over the trade thus obtained resulted in an Act of
Parliament in 1696 to mitigate the monopoly power of the factors. With the development of

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larger firms who built their own sales forces, distribution channels, and knowledge of the
financial strength of their customers.
By the twentieth century in the United States factoring was still the predominant form
of financing working capital for the then high growth rate textile industry. In part this
occurred because of the structure of the US banking system with its myriad of small banks
and consequent limitations on the amount that could be advanced prudently by any one of
them to a firm.[35] In Canada, with its national banks the limitations were far less restrictive
and thus factoring did not develop as widely as in the US. Even then factoring also became
the dominant form of financing in the Canadian textile industry.
By the first decade of the twenty first century a basic public policy rationale for
factoring remains that the product is well suited to the demands of innovative rapidly growing
firms critical to economic growth.[36]A second public policy rationale is allowing
fundamentally good business to be spared the costly management time consuming trials and
tribulations of bankruptcy protection for suppliers, employees and customers or to provide a
source of funds during the process of restructuring the firm so that it can survive and grow.

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MEANING OF FACTORING
Factoring is a financial transaction and a type of debtor finance in which a
business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at
a discount. A business will sometimes factor its receivable assets to meet its present and
immediate cash needs. Forfaiting is a factoring arrangement used in international trade
finance by exporters who wish to sell their receivables to a forfaiter. Factoring is commonly
referred to as accounts receivable factoring, invoice factoring, and sometimes accounts
receivable financing. Accounts receivable financing is a term more accurately used to
describe a form of asset based lending against accounts receivable. The Commercial Finance
Association is the leading trade association of the asset-based lending and factoring
industries.
Factoring is not the same as invoice discounting (which is called an "Assignment of
Accounts Receivable" in American accounting as propagated by FASB within GAAP).[10]
[2]

Factoring is the sale of receivables, whereas invoice discounting ("assignment of accounts

receivable" in American accounting) is a borrowing that involves the use of the accounts
receivable assets as collateral for the loan. However, in some other markets, such as the UK,
invoice discounting is considered to be a form of factoring, involving the "assignment of
receivables", that is included in official factoring statistics. It is therefore also not considered
to be borrowing in the UK. In the UK the arrangement is usually confidential in that the
debtor is not notified of the assignment of the receivable and the seller of the receivable
collects the debt on behalf of the factor. In the UK, the main difference between factoring and
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invoice discounting is confidentiality. Scots law differs from that of the rest of the UK, in that
notification to the account debtor is required for the assignment to take place. The Scottish
Law Commission is currently reviewing this position.

DEFINITION
Factoring is a service involving the purchase by a financial organization, called a
factor, of receivables owned to manufacturer and distributors by their customers, with the
factor assuming full credit and collection responsibilities.
Factoring is a service of financial nature involving the conversion of credit bills into
cash.

CHARACTERISTICS OF FACTORING
1

Usually the period for factoring is 90 to 150 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.

Bad debts will not be considered for factoring.

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

Factoring is a method of off balance sheet financing.

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Cost of factoring=finance cost + operating cost. Factoring cost vary according to the
transaction size, financial strength of the customer etc. The cost of factoring varies from 1.5%
to 3% per month depending upon the financial strength of the client's customer.

Indian firms offer factoring for invoices as low as 1000Rs

For delayed payments beyond the approved credit period, penal charge of around 1-2% per
month over and above the normal cost is charged (it varies like 1% for the first month and 2%
afterwards).

HOW FACTORING WORKS

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PROCESS OF FACTORING
The factoring process can be broken up into two partsthe initial account setup and
ongoing funding. Setting up a factoring account typically takes one to two weeks and
involves submitting an application, a list of clients, an accounts receivable aging report and a
sample invoice. The approval process involves detailed underwriting, during which time the
factoring company can ask for additional documents, such as: documents of incorporation,
financials, banks statements, etc. If approved, the business will be setup with a maximum
credit line from which they can draw from. In the case of notification factoring, the
arrangement is not confidential and approval is contingent upon successful notification; a
process by which factoring companies send the business's client or account debtor a Notice of
Assignment. The Notice of Assignment serves to 1) inform debtors that a factoring company
is managing all of the business's receivables, 2) stake a claim on the financial rights for the
receivables factored, and 3) update the payment address usually a bank lock box.
Once the account is set up, the business is ready to start funding invoices. Invoices are
still approved on an individual basis, but most invoices can be funded in a business day or
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two, as long as they meet the factors criteria. Receivables are funded in two part. The first
part is the "advance" and covers 80% to 85% of the invoice value. This is deposited directly
to the business's bank account. The remaining 15% to 20% is rebated, less the factoring fees,
as soon as the invoice is paid in full to the factoring company.

FLOW CHART OF FACTORING

credit sale of goods

Customer

Client
Invoice

Pays the balance amount

Pays the amount (In recourse type customer pays through client)
Submit invoi

Payment up to 80% init

Factor

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COMMON FACTORING TERMS

Page 10 of 65

A)

DISCOUNT RATE OR FACTORING FEE

The discount rate is the fee a factoring company charges to provide the
factoring service. Since a formal factoring transaction involves the outright purchase
of the invoice, the discount rate is typical stated as a percentage of the face value of
the invoices. For instance, a factoring company may charge 5% for an invoice due in
45 days. In contrast, companies that do accounts receivable financing may charge per
week or per month. Thus, an invoice financing company that charges 1% per week
would result in a discount rate of 6-7% for the same invoice.

B)

ADVANCE RATE
The advance rate is the percentage of an invoice that is paid out by the
factoring company upfront. The difference between the face value of the invoice and
the advance rates serves to protect factors against any losses and to ensure coverage
for their fees. Once the invoice is paid, the factor gives the difference between the
face value, advance amount and fees back to the business in the form of a factoring
rebate.

C)

RESERVE ACCOUNT
Whereas the difference between the invoice face value and the advance serves
as a reserve for a specific invoice, many factors also hold an ongoing reserve account
which serves to further reduce the risk for the factoring company.
This reserve account is typically 10-15% of the seller's credit line, but not all
factoring companies hold reserve accounts.

D)

LONG-TERM CONTRACTS AND MINIMUMS

While factoring fees and terms range widely, many factoring companies will
have monthly minimums and require a long-term contract as a measure to guarantee a
profitable relationship. Although shorter contract periods are now becoming more
common, contracts and monthly minimums are typical with "whole ledger" factoring,
which entails factoring all of a company's invoices or all of the company's invoices
from a particular debtor.

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E)

SPOT FACTORING
Spot factoring, or single invoice discounting, is an alternative to "whole
ledger" and allows a company to factor a single invoice. The added flexibility for the
business, and lack of predictable volume and monthly minimums for factoring
providers means that spot factoring transactions usually carry a cost premium.

F)

NOTIFICATION VS. NON-NOTIFICATION

Factoring has traditionally operated under a mandatory notification
arrangement.This involves the factoring company notifying the seller's clients about
the factoring relationship and requiring future payments to be made to the factoring
company. Today, many factoring companies also offer a non-notification option that
allows sellers to advance their invoices without involving a third party.

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SPECIALIZED FACTORING

With advances in technology, some invoice factoring providers have adapted to

specific industries. This often affects additional services offered by the factor in order to best
adapt the factoring service to the needs of the business. An example of this includes a
recruitment specialist factor offering payroll and back office support with the factoring
facility; a wholesale or /distribution factor may not offer this additional service. These
differences can affect the cost of the facility, the approach the factor takes when collecting
credit, the administration services included in the facility and the maximum size of invoices
which can be factored.

REAL-ESTATE
Since the 2007 United States recession one of the fastest growing sectors in the
factoring industry is real estate commission advances. Commission advances work the same
way as factoring but are done with licensed real estate agents on their pending and future real
estate commissions. Commission advances were first introduced in Canada but quickly made
its way to the United States. Typically how the commission advance process works is they
apply online, sign contracts selling their future real estate commissions at a discount, and then
the funds are wired to their bank account.

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MEDICAL FACTORING
The healthcare industry makes for a special case in which factoring is much needed
because of long payment cycles from government, private insurance companies and other
third party payers, but difficult because of HIPPA requirements. For this reasons medical
receivables factoring companies have developed to specifically target this niche.

CONSTRUCTION
Factoring is common place in the construction industry because of the long payment
cycles that can stretch to 120 days and beyond. However, the construction industry has
features that risky for factoring companies. Because of the risks and exposure
from mechanics liens, danger of "paid-when-paid" terms, existence of progress billing, use of
withholding, and exposure to economic cycles most "generalist" factoring companies avoid
construction receivables entirely. That has created another niche of factoring companies that
specialize in construction receivables.

TRUCKING
Factoring is often used by trucking companies to cover upfront expenses, such as fuel.
Factoring companies that cater to this niche offer services to help accommodate truckers on
the road, including the ability to verify invoices and fund on copies sent via scan, fax or
email, and the option to place the funds directly onto a fuel card, which works like a debit
card. Trucking factors also offer fuel advance programs that provide a cash advance to
carriers upon confirmed pickup of the load.

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ELEGIBILITY FOR FACTORING SERVICES

Singapore Registered entity.
Company must be in operation for the last two years.
Trades domestically on credit terms.
It set up and registered as a company.
Has a minimum net worth of Rs. 5 Crore.
Has adequate infrastructure.
Had employed person with adequate professional and other relevant experience, as
per SEBI direction.
Promoters have professional competence, financial found and a general reputation of
fairness and integrity in Business transaction, to satisfaction of SEBI.

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FACTORING MECHANISM
A factor provides finance to his client upto a certain percentage of the unpaid invoices
which represent the sales of goods or services to approved customers. The mechanism of the
factoring scheme is as follows:
purchasing
There should
should
be a be
factoring
purchasing arrangement)between
o There
arrangement)
a arrangement
factoring(invoice
arrangement
(invoice
the client (which sells the goods and services to trade customer in credit) and the

factor, which is the financing organization.

Whenever the client sell goods to the trade customers on credit he prepares invoices in

the usual way.

The goods are sent to the buyers without raising a bill of exchange but accompanied

by an invoice.
The debt due to the purchaser to the client is assigned to the factor by advising the

trade customers to pay the amount due to the client, to the factor.
The client hand over the invoices to the factor under cover of a schedule of offer

along with the copies of invoices and receipted delivery challans.

The factors makes an immediate payment upto 80% of the assigned invoices and the
balance 20% will be paid on realization of the debt.

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BENEFITS OF FACTORING

hands
over
invoicespayment
to the factor
cover
of a schedule
of offer
oThe
Theclient
factor
makes
anthe
immediate
uptounder
80% of
the assigned
invoices
and

Page 17 of 65

FACTORING COMPANIES IN INDIA

1.

Can Bank factors limited.

2.

SBI factors and commercial services Pvt. Ltd.

3.

The Hong Kong and Shanghai Banking Corporation Limited.

4.

Foremost factors Limited.

5.

Global Trade Finance Limited.

6.

Export Credit Guarantee Corporation of India Limited.

7.

Citibank India.

8.

Small Industries Development Bank of India (SIDBI)

9.

Standard Chartered Bank.

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ADVANTAGES OF FACTORING

LARGER AMOUNTS:
Because accounts receivable factoring is based primarily upon accounts
receivable, small businesses with large amounts of accounts receivable for goods or
services sold to financially strong customers can often obtain a bigger line than
they would qualify for with conventional bank lenders. This is because factoring is
based on the credit strength of your customers. Banks look more at your businesses
credit strength to support their loans. Consequently, often factoring companies can
provide more financing more quickly than banks.

QUICKER SET UP AND FUNDING:

Most accounts receivable factoring lines can be approved, set up, and
actively funded in just a few weeks. Banks typically require more time to perform
their credit review of your company perhaps even waiting for upcoming fiscal
period closes or audit results. The faster set up of accounts receivable factoring
lines is because factoring companies have simpler more streamlined underwriting
requirements.

EXPANDS QUICKLY WITH GROWTH:

Most factoring companies can expand their financing for you as fast as
your business grows, even if your company has little track record performing that
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much business. Factoring companies have no bureaucracy hindering the increase of

a line size. So you are not likely to outgrow your line as easily. Just be sure you
have a factoring company big enough to accommodate your growth ambitions.

NOT A LOAN:
A factoring company is not making loans. They are purchasing the
accounts receivable with cash. This has the same result of increasing working
capital but many accountants would not show this as a liability on the balance sheet
the way a bank loan would appear. So factoring, instead of borrowing, reduces
balance sheet debt resulting in a lower debt to equity ratio.

LESS COSTLY THAN EQUITY:

In need of financing many businesses turn to equity investors. For some
business investment and expansion purposes, there is no substitute for equity
capital. However, most equity investors expect higher returns than the costs of
accounts receivable factoring and new equity contributions dilute the ownership
stake of existing owners often even shifting control. Most factoring arrangements
have no dilutive effect on shareholders.

IMPROVES YOUR TURN:

Many factoring companies verify invoices with your customers and
follow up promptly if your invoices are not paid on time. These gentle reminders to
your customers usually result in more timely payments and it frees you and your

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staff up from having to perform these administrative tasks to focus on your product
or service delivery.

DISADVANTAGES OF FACTORING

MORE EXPENSIVE THAN A BANK LOAN:

Accounts receivable factoring is more expensive than bank financing
because of the transactional work with the invoices the factoring company does to
advance more money more quickly. Costs vary significantly between factors and
comparing rates and fees can be challenging. Consequently, invoice factoring cost
drivers need to be carefully understood.

SHRINKS AS BUSINESS CONTRACTS:

Factoring can grow rapidly with you but also contracts as quickly if your
business is contracting. So factoring may not be a good solution for businesses with
great seasonality or other significant downward fluctuations in revenue.

NOTIFICATION:
Factoring companies typically require that you assign the accounts
receivable to them. This means that your customers accounts payable departments
will be notified to send payments to the factoring companys lockbox. Some
businesses are concerned this will affect their customer relationships but factoring
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is such a commonly used form of financing that a professionally delivered factoring

service rarely draws much notice from customers. Typically, the process is
routinely handled in the Accounts Payable department. However, it is important to
thoroughly understand the terms of a factoring agreement to know if costs or delays
in payment may result from the notification process.

FEATURES OF FACTORING:

The features of factoring have been explained below:-

1.

It is very costly.

2.

In factoring there are three parties: The seller, the debtor and the factor.

3.

It helps to generate an immediate inflow of cash.

4.

Here the full liability of debtor has been assumed by the factor.

5.

Factors has the right to take any legal action required to recover the debts.

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FACTORING SERVICES IN INDIA

Though factoring services have been introduced since 1991 in India still it is
quite new in the sense that factoring product is not widely known in many parts of the
country. Recognizing the utility of factoring services for small and medium size industrial
and commercial enterprises in India, for the first time the Vaghul Committee which submitted
its report on the Money Market, recommended the development of a system of factoring of
open account sales particularly for the small scale industrial units.
This committee further observed that both banks and non-bank financial
institutions in the private sector should be encouraged to set up institutions for providing
factoring services. Later, the Kalyanasundaram Committee, which was appointed by the
Reserve Bank of India (RBI) in 1988 specifically for exploring the possibilities of launching
factoring services in India, found an abundant scope for such services and hence strongly
advocated for the introduction of factoring services in India. This committee also observed
that banks were ideally suited for providing factoring services to the industries in the
economy. However, the said Committee expressed the view that to begin with only four or
five banks either individually or jointly should be allowed on zonal basis to undertake
factoring services.

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The recommendations of Kalyanasundaram Committee were accepted by the

RBI. Subsequently a suitable amendment was made in the Banking Regulation Act 1949, so
as to allow banks to set up subsidiary company for undertaking factoring services. To begin
with, the RBI permitted both the State Bank of India and Canara Bank to start factoring
services through their own subsidiaries. Accordingly, two factoring companies in India, i.e.
SBI Factors and Commercial Services Ltd. and Canbank Factors Ltd; sponsored by the State
Bank of India and Canara Bank respectively, commenced operations in 1991.
However, later on, the RBI lifted these area restrictions on their operations and
accordingly, both these companies were given permission to expand and operate their
business in other parts of the country. In view of this, they can operate on all-India basis. In
1993 the RBI allowed all the scheduled commercial banks to introduce factoring services
either departmentally or through a subsidiary set-up. Besides SBI Factors and Commercial
Services and Canbank Factors Ltd., there are a few non-banking finance companies such as
Formost Factors Ltd., Global Trade Finance Pvt. Ltd. (a subsidiary of EXIM Bank) and
Integrated Financial Services Ltd., which are also in the business of domestic factoring in
India. Of these, Global Trade Finance Pvt. Ltd. and Formost Factors Ltd. have undertaken the
business of export factoring also. Besides these non-banking finance companies, Small
Industries Development Bank of India (SIDBI), Hongkong and Shanghai Banking
Corporation have been offering factoring services to their clients. Almost all of them have
been providing factoring services to the SSI and non-SSI units.

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TYPES OF FACTORING

RECOURSE AND NON-RECOURSE FACTORING

Under a recourse factoring arrangement, the factor has recourse to the client (firm) if the
debt purchased/receivables factored turns out to be irrecoverable. If the customer defaults in
payment, the client has to makes good the loss incurred by the factor. The factor charges the client
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for maintaining the sales ledger and debt collection services and also for the interest for the period on
the amount drawn by the client.
The factor does not have the right of recourse in the case of non-recourse factoring. The
loss arising out of irrecoverable receivables is borne by him, as a compensation which he charges a
higher commission.

ADVANCE AND MATURITY FACTORING

A drawing limit, as a pre-payment, is made available by the factor to the client as soon as
the factored debts are approved. The client has to pay interest on the advance between the date of
such payment and the date of actual collection from the customers.
The maturing factoring is also known as Collection factoring. Under such arrangements,
the factor does not make a pre-payment to the client. The payment is made either on the guaranteed
payment date or on the date of collection.

FULL FACTORING
This is the most comprehensive form of factoring combining the features of almost all the
factoring services specially those of non-recourse and advance factoring. Full factoring provides the
entire spectrum of services (collection, credit protection, sales ledger administration and short term
finance).

DISCLOSED AND UNDISCLOSED FACTORING

In disclosed factoring, the name of the factor is disclosed in the invoice by the suppliermanufacturer of the goods asking the buyer to make payment to the factor. The supplier may
continue to bear the risk of non-payment by the buyer without passing it on to the factor.
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The name of the factor is not disclosed in the invoice in undisclosed factoring although
the factor maintains the sales ledger of the supplier manufacturer. The entire realization of the
business transaction is done in the name of Supplier Company but all control remains with the factor.
He also provides short-term finance against sales invoice.

DOMESTIC AND EXPORT/CROSS-BORDER/INTERNATIONAL

FACTORING
In the domestic factoring, the three parties involved, namely, customer(buyer),
client(seller-supplier) and factor (financial intermediary) are domiciled in the same country.
The process of export factoring is almost similar to domestic factoring except in respect
of the parties involved. There are usually four parties involved in cross-border factoring transaction.
They are: exporter (client), importer (customer), export factor and import factor.

Page 27 of 65

Page 28 of 65

TERMS AND CONDITIONS

Assignment of debt in favor of the factor,

Selling limits for the client,

Conditions within which the factor will have recourse to the client in case of
non-payment by the trade customer,

Circumstances under which the factor for his services, say for instance, as a
certain percentage on turnover,

Interest to be allowed to the factor on the account where credit has been
sanctioned to the supplier, and

Limit of any overdraft facility and the rate of interest to be charged by factor.

FUNCTIONS
Purchase and collection of debt
Sales ledger management
Credit investigation and undertaking of credit risk
Provision of finance against debts
Rendering consulting services

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vi. Factoring
balance
sheet
is financing.
a method of off
COST OF FACTORING
If your business is growing quickly, turns receivables slowly or operates in an
industry that banks are traditionally reluctant to lend to, you know that factoring may be your
only option to obtain working capital. On the other hand, you may have spent weeks
studying all of your options for financing your business and have decided that factoring might
be right for you because it is easy, has very little paperwork compared to traditional
financing, and is based on the credit of your customers rather than yours. Either way, there
are a few things you need to understand about factoring before you jump in head first.
Keep in mind that there are many benefits to factoring. However the first
thing you need to know about factoring is that it will generally cost your business more than
traditional financing. When a factor buys your invoice at a discount, the discount percentage
may not sound too bad. However, keep in mind that the discount rate multiplied by the turn
ratio equals the effective interest rate you are paying by factoring. For example, if a factor
buys your invoice at a 1.5% discount for 30 days, you are effectively paying 18% interest
(1.5% x turn ratio of 12, which is calculated by dividing 30 into 365 days). And obviously
the higher the discount rate or the shorter the terms, the effective interest you pay increases.

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Second, factoring companies generally don't explain their fees in terms of

interest rates. Technically, factoring fees is not interest; it is a fee. A factor is not going to sit
you down and let you know that they are effectively charging you 18, 24 or 36 perecnt
interest. It is not in their best interest to do that.

Third, make sure you understand what type of factoring facility you are
entering into. Generally, your options will be to factor with or without recourse. If you
factor without recourse, once you have sold your invoice to the factor, you are not liable if
your customer fails to make payment to the factor. If you factor with recourse and your
customer fails to pay the factor, you will most likely be obligated to pay the factor for the
invoice or replace it with a new invoice at no cost to the factor. Before entering into a
contract with a factor, be sure you understand if you are entering into a recourse or
nonrecourse agreement and know exactly what the terms are.
Finally, make sure that when you select a factor to work with you are
comfortable with them. Some factors only look out for their own interests and try to take
advantage of those who don't understand the process that well. A good factor will view his
relationship with his clients as a partnership. The relationship has to be a win-win
relationship. A good, reputable factor will not try and hide the true cost of factoring from his
clients and will often times encourage his clients to develop a financial plan so the client
won't have to factor any longer than necessary. A good factor understands that if he treats his
clients with fairness and professionalism, his clients will ultimately recommend him to
others.

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Factoring may be your financing option of choice, or it may be your only

option. Regardless of your reason for choosing to factor, it is best to know all the facts and
circumstances before entering into a factoring agreement.

BASICS OF FACTORING

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RECOURSE V. NON-RECOURSE FACTORING

When factoring invoices, there are typically two types of accounts receivable
factoring offered by factors - recourse and non-recourse factoring. Factoring with recourse is
where the client selling the invoice is required to buy the invoice back from the factor if it
goes uncollected for a fixed number of days, thus sharing the risk between the client and the
factor. Factoring without recourse is where the client sells the invoice to the factor and the
factor bears all the risk for collection of the invoice. Both options have pros and cons that
need to be weighed in your decision as you decide which type of factoring arrangement to go
with.
Factoring with recourse is generally more common in most industries because
the client selling the invoice shares the risk with the factor. Factoring with recourse is
generally a less expensive form of factoring because the factor bears less risk. Additionally,
if your business rarely writes off bad receivables, factoring with recourse may be your best
bet because you can be confident that you will collect on the invoice and save money on
factoring fees. The down side is you may have to buy back an invoice if you or the factor are
unable to collect the invoice in the specified time outlined in your factoring agreement.

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Factoring without recourse is a good option when the collectibility of your

invoices is uncertain or you just don't want to share in the risk of collection. Non-recourse
factoring is common in certain industries, such as transportation, but is generally less
common throughout most industries. Moreover, non-recourse factoring will incur slightly
higher fees than factoring with recourse.

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OTHER TYPES OF FACTORING

There are two types of factoring undertaken here:
A)

Domestic factoring

B)

Export factoring

C)

International Factoring

A)

DOMESTIC FACTORING

BILL 2 CASH (RECEIVABLES FACTORING FACILITY)

Bill 2 Cash is a domestic factoring facility offered by us where the seller invoices
the goods to the buyer, assigns the same to SBI Factors and receives prepayment up to
90% of the invoice value immediately. The balance amount is paid to the client when the
customer pays us
RECOURSE FACTORING:
In recourse factoring , seller undertakes to collect the debt from the buyer. In the
event of the buyer failing to pay the amount on maturity, factor will recover the amount

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from the client.

NON RECOURSE FACTORING :
In Non recourse factoring, factor undertakes to collect the debts from the buyer.
In other words, in case the buyer fails to pay, the factor will have no recourse to the
seller and will absorb the bad debts himself.

EXPORT FACTORING
Our Export Factoring service offers you a complete package to help you

develop your overseas business profitably and with confidence

Under Export Factoring, we factor invoices drawn on overseas buyers and make
a

prepayment

of

up

to

90%

of

the

invoice

amount,

immediately.

Under two-factor system, the factor handling the collection of export receivables of
clients (exporters) is called Export Factor (EF) and the factor in buyers country who
undertake collection and credit protection services is called Import factor.
The following steps are involved:

The exporter ships the goods to importer.

The exporter assigns his invoices through the export factor to the import factor
who assumes the credit risk. (as per prior arrangement).

The Export factor prepays invoices

The importer pays the proceeds to the Import factor, who transfers the amount to
Export factor

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The export factor deducts prepayment already made, other charges and pays the
balance proceeds to the exporter.

The benefits accruing to you from Export Factoring would be:

100% credit cover, as compared to 80% offered by export credit agencies.(In case
you get the facility from a bank, you will have to go in for an ECA cover.)

Claims will be settled in invoice currency, as against in domestic currency in case

of bank finance.

C)

INTERNATIONAL FACTORING
In international factoring there are usually two factors. The export factor

looks at financing the exporter and sales administration (presenting invoices at the right
time, collecting payments being the key tasks). The import factor is interested in
evaluating the buyer, collecting the money on time at the same time ensuring that he is
protected against default.
International factoring encompasses all the four services, that is, prepayments, sales ledger administration, credit protection and collections.
Guide to International Factoring:
The importer places the order for purchase of goods with the exporter.
The exporter requests the Export Factor for limit approval on the importer. Export
Factor in
Turn forwards this request to an Import Factor in the Importer's country. The
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Import Factor
Evaluates the Importer and conveys its approval to the Export Factor who in turn
conveys
Commencement of the Factoring arrangement to the Exporter.
The exporter delivers the goods to the importer.
Exporter produces the documents to the Export Factor.
The Export Factor disburses funds to the Exporter upto the prepayment amount
decided and at the
Same time the forwards the documents to the Import factor and the Importer.
The invoice. The exporter receives the balance payment.

CASE STUDY OF SUNLIGHT INDUSTRIES LTD

Sunlight industries ltd. manages its account receivables by its sales and credit
department. The cost of sales ledger administration stands at Rs 9 crore annually. It
supplies chemicals to heavy industries. These chemicals are used as raw material for
further use or are directly sold to industrial units for consumption. There is a good
demand for both the types of uses. For the direct consumers, the company has a credit
policy 2/10, net 30. Past experience of the company has been that on avg. 40% of the
customer avail of the discount while the balance of the receivables are collected on an
avg. 75 days after the invoice date. Sunlight industries also has small dealer networks
that shall the chemicals bad debt of the company are currently 1.5% of total sales.
Sunlight industries finances its investment in debtors through a mix of bank credit
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and own long term funds in the ratio of 60:40 current cost of bank credit and long term
funds are 12% and 15% respectively.
There has been a consistent rise in the sales of company due to its proactive
measures in cost reduction and maintaining good relations with dealers and customers.
The projected sales for the next year are Rs 800 crore of 50% from last year. Gross
profits have been maintain at a healthy 22% over the years and are expected to continue
in futures.
With escalating cost associated with the in-house management of debtors coupled
with the need to unburden the management with the task so as to focus on sales
promotion, the CEO of Sunlight Industry examine the possibility of outsourcing its
factoring service for managing its receivables. He assigns the responsibility to Anita
Guha, the CFO of Sunlight. Two proposals the details of which are given below are
available for Anitas consideration.
Proposal from Canbank Factors Ltd.: The main element of the proposal
are :
i.

Guaranteed payment within 30 days

ii.

Advance, 88% and 84% for the recourse and non-recourse arrangement
respectively

iii.

Discount charge in advance 21% for recourse and 22% without recourse

iv.

Commission, 4.5% without recourse and 2.5% with recourse

Proposal from Indbank Factors:

i.

Guaranteed payment within 30 days

ii.

Advance 84% with recourse and 80% without recourse

iii.

Discount charge upfront, without recourse 21% and with recourse 20%

iv.

Commission upfront, without recourse 3.6% and with recorse 1.8%

The opinion of the chief Marketing manager is that in context of the factoring
arrangement his staff would be able to exclusively focus on sales promotion which would
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result on additional sales of Rs 75 crore.

FINANCIAL ANALYSIS OF RECEIVABLES MANAGEMENT ALTERNATIVES

(Rs crore)

(A) In house Management :

Cash discount(Rs 800 croreX0.40X0.20)

Rs 6.4

Bad debts (Rs 800 croreX0.015)

12.0

Opportunity Cost (Forgone contribution on lost sales) [Rs 75 croreX0.205

net of bad debts]

15.4

Avoidable administrative and selling expenses

9.0

Cost of investment in receivables

14.4

Total Cost

57.2

Avg. collection period (0.40X10days)+(0.60X75days)=49 days

Investment in debtors: (Rs108.9X0.60X0.12)+ (Rs108.9X0.40X0.15)= Rs
14.4 crore

(B) Canbank factors Proposal:

Factoring Commission (Rs 875 croreX0.025)

(Rs 875 croreX0.045)
Discount charge(Rs 750.7*croreX.21X30/360)
(Rs 701.9**croreX.22X30/360)

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With recourse

Without recourse

21.9

39.4

13.1

12.9

Cost of long term funds invested in debtors:

[(Rs 875 crore-Rs750.7 crore)X0.15X30/360]

1.6

[(Rs 875 crore-Rs701.9 crore)X0.15X30/360]

2.2

36.6

54.5

*Amount of Advance=0.88X(Rs 875crore Rs 21.9 crore)= Rs 750.7crore

**Amount of Advance=0.84X(Rs 875crore Rs 39.4 crore)= Rs 701.9crore

(C) Indbank Factor Proposal

With recourse

Without recourse

15.7

31.5

12.0

11.8

1.9

2.5

Factoring Commission (Rs 875 croreX0.018)

(Rs 875 croreX0.036)

Discount charge(Rs 721.8 croreX.20X30/360)

(Rs 674.8 croreX.21X30/360)

Cost of long term funds invested in debtors:
[(Rs 875 crore-Rs721.8 crore)X0.15X30/360]
[(Rs 875 crore-Rs674.8 crore)X0.15X30/360]
45.8

29.6

Amount of Advance=0.84X(Rs 875crore Rs 15.7 crore)= Rs 721.8crore

Amount of Advance=0.80X(Rs 875crore Rs 31.5 crore)= Rs 674.8crore

Decision Analysis: Recourse Factoring

Particulars

Canbank

Indbank

Benefits (Rs 57.2-Rs 12 Bad debts to be born by company)

45.2

45.2

Costs

36.6

29.6

Net Benefits

8.6

15.6

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Decision Analysis: Non-Recourse Factoring

Particulars

Canbank

Indbank

Benefits (Rs 57.2+Rs 1.1Bad debts to be borne by factor)

58.3

58.3

Costs

54.5

45.8

Net Benefits

3.8

12.5

Advice: My advice to the CFO of Sunlight Industries would be to accept the proposal of
Indbank Factors for recourse factoring.

SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Board of India (SEBI) is the regulator for
the securities market in India. It was established in the year 1992 and given statutory
powers on 12 April 1992 through the SEBI Act, 1992.

HISTORY
It was established by The Government of India on 12 April
1992 and given statutory powers in 1992 with SEBI Act 1992 being
passed by the Indian Parliament. SEBI has its headquarters at the
business

district

of Bandra

Kurla

Complex in Mumbai,

and

has

Northern, Eastern, Southern and Western Regional Offices in New

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Delhi, Kolkata, Chennai and Ahmedabad respectively. It has opened

local offices at Jaipur and Bangalore and is planning to open offices at
Guwahati, Bhubaneshwar, Patna, Kochi and Chandigarh in Financial
Year 2013 - 2014. Controller of Capital Issues was the regulatory
authority before SEBI came into existence; it derived authority from
the Capital Issues (Control) Act, 1947. Initially SEBI was a non statutory
body without any statutory power. However, in 1995, the SEBI was
given additional statutory power by the Government of India through
an amendment to the Securities and Exchange Board of India Act,
1992. In April 1988 the SEBI was constituted as the regulator of capital
markets in India under a resolution of the Government of India.
The SEBI is managed by its members, which consists of following:
1. The chairman who is nominated by Union Government of India.
2. Two members, i.e., Officers from Union Finance Ministry.
3. One member from the Reserve Bank of India.
4. The remaining five members are nominated by Union Government of India, out
of them at least three shall be whole-time members.
FUNCTIONS AND RESPONSIBILITIES OF SEBI

The Preamble of the Securities and Exchange Board of India describes the
basic functions of the Securities and Exchange Board of India as "...to protect the
interests of investors in securities and to promote the development of, and to regulate the
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securities market and for matters connected there with or incidental there to".
SEBI has to be responsive to the needs of three groups, which constitute the market:

the issuers of securities

the investors

the market intermediaries.

SEBI has three functions rolled into one body: quasi-legislative, quasijudicial and quasi-executive. It drafts regulations in its legislative capacity, it conducts
investigation and enforcement action in its executive function and it passes rulings and
orders in its judicial capacity. Though this makes it very powerful, there is an appeal
process to create accountability. There is a Securities Appellate Tribunal which is a threemember tribunal and is headed by Mr. Justice J P Devadhar, a former judge of the
Bombay High Court. A second appeal lies directly to the Supreme Court. SEBI has taken
a very proactive role in streamlining disclosure requirements to international standards.

POWERS OF SEBI

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For the discharge of its functions efficiently, SEBI has been vested with the
following powers:
1. to approve bylaws of stock exchanges.
2. to require the stock exchange to amend their bylaws.
3. inspect the books of accounts and call for periodical returns from recognized
stock exchanges.
4. inspect the books of accounts of financial intermediaries.
5. compel certain companies to list their shares in one or more stock exchanges.
6. registration brokers.
There are two types of brokers:
1. circuit broker
2. merchant broker
SEBI committees
1. Technical Advisory Committee
2. Committee for review of structure of market infrastructure institutions
3. Advisory Committee for the SEBI Investor Protection and Education Fund
4. Takeover Regulations Advisory Committee

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5. Primary Market Advisory Committee (PMAC)

6. Secondary Market Advisory Committee (SMAC)
7. Mutual Fund Advisory Committee
8. Corporate Bonds & Securitization Advisory Committee

PROCUREMENT PROCEDURES IN FACTORING

INTRODUCTION AND BACKGROUND
This procedure provides an easy to understand document for all areas of the
business to use when looking to purchase goods and services.
As a Non-Departmental Public Body (NDPB), SQA is accountable to the
Scottish Government. Details of this relationship and associated responsibilities are set
out in the Management Statement and Financial Memorandum (MSFM). As a
Government funded body SQA must comply with various laws and Government
regulations. These are set out in a number of documents (including the Scottish Public
Finance Manual, HM Treasury guidance, Public Contracts (Scotland) Regulations 2012
and European Union procurement directives) to ensure that all external spend has been
transparent, fair and achieved value for money.

PURPOSE
The aim of this procedure is to ensure that all purchases made by SQA staff
conform to the regulations stated above, and embrace our management principles. An
integral part of this procedure is the provision of a process which facilitates and supports
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those charged in carrying out any procurement task.

SCOPE
Procurement covers the process of acquisition of goods and services (including
consultancy) from third parties. It ranges from initial concept and definition of business
need through to the end of the useful life of a purchased asset or service contract.

POLICY
As a public sector organisation, it is vital that SQA observes the highest
standards of integrity when dealing with all matters concerning the procurement of goods
and services. In particular SQA must:
be fair, efficient, transparent, firm and courteous
publicise procurement contact points and make available as much information
as suppliers need to respond to the tendering process
notify the outcome of tenders promptly and, within the bounds of commercial
confidentiality, debrief winners and losers on request on the outcome of the
tendering process to facilitate better performance on future occasions
achieve the highest professional standards in the award and management of
contracts
respond promptly, courteously and efficiently to suggestions and enquiries
respect the confidentiality of information relating to a tender or contract and
never use the information for personal gain
Not only must SQA be seen to be open and accountable in all its transactions,
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but we must also ensure that we operate fairly and efficiently and make best use of
taxpayers money. This should be achieved through competition unless there are
compelling reasons to allow for a direct award to a supplier; approval must sought by the
Director of Finance prior to the order being placed.

All procurement exercises should be based on the Most Economically

Advantageous Tender (MEAT) and provide Best Value for SQA.
Best Value, otherwise known as Value for Money, means taking into account the
optimum combination of whole life cost and quality necessary to meet SQAs
requirements and not simply on initial costs. See examples below:
total cost
warranty or maintenance costs
disposal cost of goods
travel costs
maximum product and service development cost
mutually beneficial commercial relationships
effective management of contractual relationships
environmental impact

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ROLES AND RESPONSIBILITIES

AUTHORISING SIGNATORY
The Scheme of Delegation determines the authorised signatory of the contract.

CONTRACT SPONSOR
The Contract Sponsor (normally a Head of Service) will be accountable to the
Authorising Signatory. The role of Contract Sponsor and the Authorising Signatory may
be the same individual, but regard should be given to the separation of duties at all times.
If there is a conflict of interest then the Procurement team should be contacted.
The Contract Sponsor is the responsible and accountable officer for a given
contract, and owns responsibility for the terms secured and the quality of the contract in
terms of Most Economically Advantageous Tender (Best Value and Fitness for Purpose).
The Contract Sponsor is responsible for managing the contract in terms of
performance, scheduling the appropriate reviews and implementing any adjustments as
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required. The Contract Sponsor will chair contract reviews with support from the
Purchase Agent.

PURCHASE AGENT
The Purchase Agent is responsible for obtaining quotes for all spend below
25,000 for the relevant business area. The Purchase Agent assists the Contract Sponsor,
in the preparation of the specification, including the evaluation criteria. The Purchase
Agent will also support the Contract Sponsor following contract award, in all contract
review meetings with the supplier. The Purchase Agent will be supported by the
Procurement team as required.

PURCHASE ORDER ADMINISTRATOR (POA)

Each business area should have at least one POA to enable purchase orders to be
raised. They will be responsible for ensuring the information on the purchase order
accurately reflects the exact requirements, cost centre and cost. The following is a
summary of POA responsibilities:
process SAP purchase orders for their business area
be the point of contact for suppliers and Accounts Payable
monitor order and invoice status
run standard reports on orders for business area managers

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STATISTICAL DATA OF FACTORING

Statistics for factoring volumes are gathered by FCI on a yearly basis with
the assistance of its local members.

Figures available relate to factoring volume per country including an overview

of the estimated number of active factoring companies per country (regardless of whether
they are FCI members). Figures indicating the total figure per country over the past seven
years are also available

There is also an overview of the accumulative total turnover for FCI members
over the last seven years and compares these to the worldwide' figures for all factoring
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companies.

GROWTH OF FACTORING IN INDIA

INTRODUCTION
Factoring is a financial transaction whereby a business sells its accounts
receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for
immediate money with which to finance continued business. Factoring differs from a
bank loan in three main ways. First, the emphasis is on the value of the receivables
(essentially a financial asset), not the firm's credit worthiness. Secondly, factoring is not a
loan - it is the purchase of a financial asset (the receivable). Finally, a bank loan involves
two parties whereas factoring involves three.

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Factoring enables you to :

Instantly turn your receivables into cash.
Avial credit protection for your receivables.
Take well informed credit decisions.
Outsourse your sales ledger administration.
Factoring thus not only helps you in expanding your business ,but also provides
you with an efficient collection mechanism and protection against bad debts.
The three parties directly involved are: the one who sells the receivable, the
debtor, and the factor. The receivable is essentially a financial asset associated with the
debtor's Liability to pay money owed to the seller (usually for work performed or goods
sold). The seller then sells one or more of its invoices (the receivables) at a discount to
the third party, the specialized financial organization (aka the factor), to obtain cash.

CHARACTERISTICS OF FACTORING
Usually the period for factoring is 90 to 150 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
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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.
Bad debts will not be considered for factoring.
Credit rating is not mandatory. But the factoring companies usually carry out
credit risk analysis before entering into the agreement.
Factoring is a method of off balance sheet financing.
Cost of factoring=finance cost + operating cost. Factoring cost vary according to
the transaction size, financial strength of the customer etc. The cost of factoring varies
from 1.5% to 3% per month depending upon the financial strength of the client's
customer.
Indian firms offer factoring for invoices as low as 1000Rs
For delayed payments beyond the approved credit period, penal charge of around
1-2% per month over and above the normal cost is charged (it varies like 1% for the first
month and 2% afterwards).

OBJECTIVES OF FACTORING
To know who are providing the factoring facility.
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To know the condition of the firms using the factoring facility.

To know the factors responsible for the growth of factoring in india.
To know the effect of growth of factoring in india.
To know as to how the firms are getting benefit by using the factoring facility.

REVIEW OF LITERATURE
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Ron Kissling is Managing Principal of The Pyramid Consortium, a financial

services consulting group, and a former chairman of Factors Chain International. If
anyone knows about factoring, he does. He talks here about background and recent
trends in the industry.
Factoring has prospered for thousands of years due to its adaptability.
Historically, the distinctive qualities of this product have proven it to be one of the most
flexible finance tools in supporting trade. Today, factoring supports almost US$1 trillion
of annual trade from over 60 countries.
The definition of factoring can be found in the work of The International Institute
for the Unification of Private Law that is commonly known as UNIDROIT. UNIDROIT
was formed over 25 years ago to promote the international congruity of commercial law.
According to UNIDROIT, factoring must have three characteristics.
First, there must be the provision for the assignment of debts arising from the sale of
goods or services within a commercial contract. Factoring is not usually associated with
consumer debts.
Second, there must be a stipulation to provide for notification to be given to the debtors
of the assignments.
Third, the 'factor' (the company performing the factoring service) must perform at least
two of the following services:
1. finance
2. debtor account maintenance
3. debt collection

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These characteristics provide the flexibility for factoring to be used either as a

finance tool or an administrative resource to support trade. The two are typically
combined to create a formidable trade product with multiple benefits.
There are numerous variations and names by which factoring is known.
Factoring's adaptability to different country's legal, economic and banking environments
is a logical outgrowth of its unique characteristics and services. The capacity to add or
remove services when developing factoring for a specific need has increased its
penetration into new markets.
This flexibility can lead to misunderstandings. As variations of factoring are
given new names there is often confusion regarding the type of product being offered.
The following names are examples that are used with factoring depending upon the
product features: maturity, non-recourse, recourse, settlement date, invoice discounting,
and bulk factoring.
Factoring with identical benefits in one country may be called something
different in another. Invoice discounting, also known as confidential factoring in most of
Europe, is known in the United States as accounts receivable financing. A complete list
of names and service variances with regard to factoring would be voluminous.

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RESEARCH METHODOLOGY
RESEARCH DESIGN
The design is the structure of any scientific work. It gives direction and
systematizes the research.
There are two main approaches to a research problem:
Quantitative Research

Qualitative Research

RESEARCH METHOD
Literature Review

DATA COLLECTIONS
PRIMARY DATA
Primary data is basically the live data which is collected on field while interacting
with the customers and is shown as list of questions.
SECONDARY DATAIt have been used for the research like through internet ,newspaper, magazines.

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WORKING OF FACTORING
Factoring provides a fast prepayment against your sales ledger. It allows you, at
a cost, to flexibly increase your working capital and improve cash flow.
Factoring is offered to businesses trading with other businesses on credit terms.
It is not normally available to retailers or to cash traders.
First, importer places an order with the exporter
Secondly, exporter gives the details of the transaction to the factor
Thirdly, exporter dispatches the goods to the importer and sends an invoice well
to pay the amount on due date to the factor
Exporter submits the copy of invoice to the factor
Factor pays the amount to exporter
Customer pays the amount to the factor on due date
Factor pays the balance to client

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GROWTH OF THE FACTORING INDUSTRY IN INDIA

SLOW GROWTH REASONS
The overall worldwide growth in factoring is estimated at 12%. Europe has the
largest market representing 64% of the world volumes with a growth of 18% during the
year. America's growth was 10%, whereas Australia recorded impressive growth of 40%.
Asia saw a fall in volume.
The growth trends mentioned above support the fact that there is enormous
scope for expansion worldwide and India is no exception to this. The potential in India is
estimated at an annual turnover of Rs. 15000 to Rs. 20000 cr, but large portion is
untapped because of the following reasons
Factoring is a standalone Product: Factoring is similar to Bill DiscountingWhat people fail to understand is that though it is similar only in one aspect, i.e., both
provides short term finance against receivables, factoring also provides a package of
other services.
Non-Recourse factoring is almost missing: Recourse factoring only provides
financing but not credit covers, whereas in case of non-recourse factoring, in the event of
default of a customer, the factor will bear the risk of bad debt. However, the facility,
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which will attract more clients, is almost missing, in India Customers are still not aware
of factoring Services: Factors have not been successful in creating awareness about the
concept of factoring. The difference between factoring and bills discounting is still not
clearly understood. The customers are still not aware of the extra benefits and services
they can enjoy through factoring; they are not demanding these services from factoring
service providers.

FUTURE PLANS OF GROWTH OF FACTORING IN

INDIA:
The long held view that India is just a services hub is also changing fast. India's
manufacturing sector is making rapid strides and could really be the base for the next
wave of growth. There is a well-known saying in investment circles that you should
invest in an emerging economy when the first international airport is built and you
should exit when the second airport comes up ie, exit at the first signal of overinvestment. China may soon reach the second airport stage. In that event.
India would make an even bigger potential growth story in the years to come.
India is evolving from a command economy focused on self-sufficiency to becoming a
key link in the global economic chain.
India is well positioned by geography, language, and historical association to
service customers in advanced economies. India also has historical trading links with the
Middle East and Africa as well as its own South Asian neighbors.
As the manufacturing base of a country expands, the scope for factoring also
increases. At the micro level, factoring is tailor-made for a company on the path of high-

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octane growth; just as at the macro level it is suited for a growing economy like India.
There is only one direction in which factoring can go in India: upwards. As the
awareness level about the benefits of factoring increases, factoring will spread its wings
across the length and breadth of the country.

LIMITATIONS
The basic disadvantage of is that it may lead to ruined relations with the
customers especially if factor engages in aggressive or unprofessional practices when
collecting accounts
Cost is another disadvantage, cost involved in factoring agreement may be more
than the cost of other methods of financing available in the business.

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RECOMMENDATIONS AND CONCLUSION

Factoring should be used by the firms by keeping in view the financial position
of the factor.
At the end it is to be concluded that factoring is now gaining its importance in
India slowly with the increase in customer's access to benefits of factoring . India's future
in factoring business seems to be luring on the facts obtained regarding the fast growth of
174 % in only 4 years .So for factoring to be successful in India government regulation/
policies need to be modified further so that more and more private players can come
forward to start up their factoring business in India .Customer awareness about benefits
of factoring is to be increased further to fight back the global leaders in factoring
business.

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BIBLIOGRAPHY
WEBSITES :http://economictimes.indiatimes.com
http://searchwarp.com
www.wikipedia.com
http://economictimes.indiatimes.com

LIST OF BOOKS REFERED:

Financial Services - By M.Y Khan
Financial Management - By I.M Pandey

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