Who or what is a Factor?
A Factor specializes in rendering a variety of factoring products and services, with experience and expertise in the lines of businesses covered.
How does Factoring work?
Very briefly - it involves the seller legally assigning the AR to the Factor who in turn inter-alia extends finance against payment obligations assumed by the debtor. In its simplest form, it works as a scalable financing tool riding on the strength of the quality of the receivables assigned to the Factor.
How much will a Factor prepay against an approved invoice?
The general practice is for the client to keep his profits on each invoice as their equity into the business. A Factor will normally therefore prepay only to the extent of the cost of goods sold.
How does Factoring help?
Factoring works best in cases where the seller doesn’t have enough balance sheet standing or collateral support to raise standalone working capital finance but has good quality receivables. Factoring typically works well for the small and medium (SME) segment and companies in their growth phase where risk appetite remains constrained. A seller will, in such cases, be able to convert such receivables to cash (for a fee) thus aiding his working capital cycle. The clear benefit here is that the cash raised is directly proportionate to the underlying sales and is hence largely scalable unlike traditional bank finance. While various structures are in vogue, a Factor can also provide a company with specialized add-ons like credit protection against bad debts, outsourcing of their sales book and funds collections etc.
How is factoring different from a bank lending Facility?
A Factoring company undertakes a transaction based on the quality of the receivables unlike a bank which takes credit decisions based on a company's financial history, cash flow and collateral. Empirically, Factoring companies are able to turn around a funding proposal within days as compared with weeks for banks in general.
How much does Factoring cost?
The cost structures of factoring companies vary across geographies. However, the usual heads of costs include an interest charge for the funded amount and service fees on transactions. Additional add-on services availed of like credit protection and collection etc. could be charged separately depending on the package structured with the client company. While factoring arrangements may end up being priced slightly higher for the incremental risks involved, it would be fair to assume that the variation (compared to traditional sources) would be fairly small.
How does factoring impact a company’s business relationships?
A good Factor will undoubtedly appreciate and indeed be sensitive to the nuances and inter-relationships between a client company and their debtors. This, in fact, is an essential understanding of the process. As such, there should be little or no impact on a company’s existing relationships.
What is Forfaiting?
Forfaiting is the purchasing of Accounts Receivables (in the form of promissory notes, bills of exchange, deferred payment letters of credit, letters of guarantee etc.) from Exporters by a Forfaiter who assumes all the risks involved with the AR.
What is the difference between factoring & bill discounting ?
Some of the key differences between factoring and bill discounting is stated below:
  • Bill discounting is always with recourse, whereas factoring can be either with recourse or without recourse.
  • In bill discounting, the drawer undertakes the responsibility of collecting the bills and remitting the proceeds to the financing agency, while the Factor usually undertakes to collect the bills of the client.
  • Bill discounting facility limits itself to a mode of finance and only that, but a Factor also provides other services like sales ledger maintenance and advisory services.
  • Discounted bills may be rediscounted several times before they mature for payment. Debts purchased for factoring cannot be rediscounted, they can only be refinanced.
  • Factoring implies the provision of bulk finance against several unpaid trade generated invoices in batches; bill financing is individual transaction oriented i.e. each bill is separately assessed and discounted.
  • Factoring is an off balance sheet mode of financing.
  • Bill discounting does not involve assignment of debts as is the case with factoring.
  • Bill discounting is individual transaction based, whereas in a factoring facility the client would have to route all invoices raised on an approved debtor through the factoring company.
Is factoring suitable for every company?
No, as much as India Factoring would like to Factor every company, those having the following characteristics are normally unsuitable:
  • Where the credit offered to customer is more than 180 days.
  • Where there are contra sales, consignment sales or sale or return arrangements.
  • Where most of the sales are to associated companies.
  • Where sales are to retail consumers or small retail outlets.