Factoring

Factoring - INVESTMENT BANKING AND FINANCIAL SERVICES...

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INVESTMENT BANKING AND FINANCIAL SERVICES FACTORING & FORFAITING
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FACTORING What is factoring? Can we structure factoring agreement as per our convenience? Factoring vis-à-vis Bills discounting What are the functions of a factor? Legal aspects of factoring Factoring in Indian Context European Experience
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What is factoring? A vendor of the goods sells on credit The vendor will sell/handover the accounts of this credit sales to the factor for collection Factor makes a part payment (advance) against the accounts purchased after adjusting for commission and interest on the advance Factor maintains the customer’s accounts & follows up for payment Factor makes the final payment to the client
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Can we structure factoring agreement as per our convenience? Yes
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Forms of Factoring Recourse Non-recourse Maturity Advance Invoice discounting Full factoring Bank participation factoring Supplier guarantee factoring Cross-border factoring – two factors factoring
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Supplier guarantee factoring
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A Problem: Under full factoring arrangement Canbank Factors (CFL) Limited and Nagaraju Textiles Ltd. (NTL) agreed to have an arrangement, where CFL would collect Rs. 200 lakh from the customers of NTL. The terms of the agreement provides for an advance payment of 80 per cent of the value of factored receivables and for guaranteed payment after three months from the date of purchasing the receivables. The advance carries a rate of interest of 16% p.a. compounded quarterly and the factoring commission is 1.5 per cent of the value of factored receivables. Both the interest and commission are collected upfront. Compute the amount actually made available to NTL. Calculate the effective cost of funds made available to NTL Ltd. Compute the effective cost of funds made available to NTL, if the interest is collected in arrear and the commission is collected upfront .
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Solution: Value of Factored Receivable Particulars Amount Rs. Value of Factored Receivables 20,00,000 Maximum permissible advance @ 80% Less: Commission @ 1.5% Less: Discount Charges @ 16% 16,00,000 30,000 64,000 Funds made available to NTL 15,06,000
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Solution: Discount Charge expressed as a percentage of funds made available Particulars Amount Rs. Discount
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Factoring - INVESTMENT BANKING AND FINANCIAL SERVICES...

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