L-8.factoring

L-8.factoring - CA(IBFS) L-8: Factoring This lesson deals...

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CA(IBFS) L-8: Factoring This lesson deals with: - 1. Concept of Factoring 2. Forms/Types of Factoring 3. Factoring vs. Bills Discounting 4. Factoring vs. Forfaiting 5. Advantages and Evaluation of a Factor 6. Legal Aspects of Factoring 7. Study Group Report (copy enclosed) 8. Factoring Services in India 1. Concepts of Factoring : Def. of Factoring: Factoring is an agreement in which receivables arising out of sale of goods/services are sold by a firm (client) to the factor (a financial intermediary) as a result of which the title to the goods/services represented by the said receivables passes on to the factor. Henceforth, the factor becomes responsible for all credit control, sales accounting and debt collection from the buyer(s). In a full service factoring i.e. without recourse facility, if any of the debtors fail to pay the dues as a result of his financial inability/insolvency/bankruptcy, the factor has to absorb the losses. 1
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The functions of factoring can be classified as:- Maintenance or Administration of Sales ledger (Factor maintains or administers sales ledger of the client company. Under open item method, each receipt is matched against the specific invoice. The customer’s account clearly reflects the various open invoices outstanding on any given date. The factor gives periodic reports to the client on the current status of his receivables, receipts and payments). Collection of Accounts Receivables (Factor undertakes to collect the receivables on behalf of the client relieving him of the collection problem and enabling him to concentrate on operations, besides reducing time, cost and manpower). Financing Trade debts (Factor purchases the book debts of the client at a price and the debts are assigned in his favor who usually grants advance to the extent of 80%-85% of the assigned debts and the balance 15%-20% is retained as a factor reserve. Where the debts are factored with recourse, the finance provided would become refundable by the client in case of non-payment by the buyer. However, where the debts are factored without recourse, the factor’s obligation to the seller becomes absolute on the due date of the invoice whether or not the buyer makes the payment. 2
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Credit Control and Credit Protection (Assumption of Credit Risk is one of the important functions of a factor. This service is provided where the debts are factored without recourse. The factor in consultation with the client fixes the credit limits for approved customers, and within these limits undertakes to purchase all trade debts of the customers. From this there are 2 benefits to the client like relieving the collection work and access to extensive information available on financial standing and credit rating of individual customers and their track record, which leads to better credit control. Credit-worthiness
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This note was uploaded on 01/28/2011 for the course FIN 315 taught by Professor Welker during the Spring '09 term at IUP.

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L-8.factoring - CA(IBFS) L-8: Factoring This lesson deals...

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