What is Factoring ?

04/10/2022

What is Factoring?

There has been a lot of curiosity about Factoring lately in the Indian Market. Not many people are aware of what Factoring is and there have been a lot of different versions going around on the Internet and in the social media. Comparison has been made to Bill Discounting, Forfaiting, Invoice Discounting Platforms, etc. In this article, we shall be telling you the fundamentals of the real authentic Factoring Product. And how can you ensure that this is authentic? Well, Factoring originated in Europe more than 50 years back and till today most of the European Banks and Factoring Companies offer the Factoring Product in the most Traditional way. India Factoring and Finance Solutions Pvt Ltd (India Factoring) is owned by two European Banks and the product of India Factoring is aligned to the most traditional form. Let understand how Factoring works.

You are a business selling goods to a reputed buyer on Credit Terms. Say 90 days Credit. You manufacture goods, ship them to your buyer and wait for the payment from the buyer on the 90th Day. The payment gets delayed. You keep following up and then you fear for the risk of non-payment from the buyer. You also face the difficult task of following up at odd time zones if your Buyer is in a foreign country. What can you do? Well, you can use Factoring to overcome these issues. Here is how it works

You sell your Invoice (Receivable) to a Factoring Company (Factor) immediately after shipment of Goods to your Buyer. Because you are selling your Receivables, the ownership of the Receivables gets transferred to the Factor. So, you are no longer the owner of the Receivables. The Factor will pay you 80% to 90% immediately and balance 20% to 10% when the buyer pays. What happens if the buyer does not pay? In such a case, the Factor bears the loss and you will still get paid your balance 20% or 10% at an agreed future date. This is the Non-Recourse Factoring Product of India Factoring.

So what are the benefits to your business?

Since you sell your Receivables immediately after shipment of goods, you get the below benefits:

• You are no longer the owner of the Receivable and hence the Receivable goes out of your Books of Accounts. No more long Overdue / Non-Performing Debtors on your Balance Sheet.
• You get most of the money (90%) upfront and need not wait for 90 days; more if your Credit Terms are higher. This improves your cash flow significantly and the higher Credit Terms imposed by your Buyer does not matter.
• Since the Factor is now the owner of the Receivables, the Factor follows up and chases the buyer for money and collects on your behalf.
• You need not spend hours at odd times following up with your buyers. You can concentrate on your new sales orders with the same buyer or new buyers.

So how much does all this cost?

The pricing for factoring has three major components:

• An Annual Fee to set up the factoring package and keep it going (usually a flat amount or a small % of your factoring limit)
• A % Charge applied on the Invoice Amount
• Interest levied on the financing of 80% to 90% to you