Session_4-5-Factoring-Forfaiting

Session_4-5-Factoring-Forfaiting - Click to edit Master...

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Unformatted text preview: Click to edit Master subtitle style 5/30/11 Non Banking Financial Services PGPBFS-2010-11 Session 4-5 5/30/11 Factoring Forfaiting 5/30/11 33 Factoring Factoring : Dictionary meaning of factor is an agent as a banking or finance company, engaged in financing the operations of certain companies. Factoring, in simple words refers to an arrangement, under which the factor or service provider, purchases the account receivables of a seller and makes immediate cash payment to the seller 5/30/11 44 Factoring .. Origin in India : Factoring service is of recent origin in India. The committee appointed by RBI under chairmanship of CS Kayansundaram ( former MD of SBI), in 1989 , recommended the introduction of factoring services to reduce the problem of companies facing inadequate working capital due to lack of timely collection of receivables. Based on the committees recommendations RBI issued some guidelines for functioning of factoring services in 1990 . 5/30/11 55 Factoring and Forfaiting.. Factoring sequence of processes.. --- refer class discussion 5/30/11 66 Functions of a Factor : The principal functions that are provided by a factor through a factoring arrangement are as follows : 1) Finance : The factor provides finance to the seller company which helps it to get adequate funding for its wor king capital needs. This helps the company to a great extent particularly if it is a small enterprise. 2) Debt administr ation : Generally in a factoring arrangement , the factor also maintains the clients sales ledger wher eby the client company 5/30/11 77 Functions of a Factor contd.. 3) Cr edit Advisor y ser vices : A factor is generally expected to have specialized knowledge and experience in finance and credit dealings and access to extensive cr edit infor mation. As such they can advise the client ( seller company) on the credit risk associated with a particular customer, trade settlement terms and credit policy to be followed etc. which may lead to better credit control by the company. 4) Relieving the client fr om Cr edit r isk totally : The factor may assume the entire credit risk and take the 5/30/11 88 Functions of a Factor contd.. 5) Follow up and collection of Receivables : The factoring agent normally being a large financial institution with a much bigger standing than its client ( the seller company) , will have much lar ger negotiation power than its client. The debtors are more likely to be responsive to the demand of payment from a factor than from a small company. The factor is also likely to have a more trained manpower, and sophisticated infrastructure to chase accounts receivables, which facilitates the collection process. 5/30/11 99 Factoring and Forfaiting.....
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This note was uploaded on 05/30/2011 for the course ECON 101 taught by Professor Ke during the Spring '11 term at Lethbridge College.

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Session_4-5-Factoring-Forfaiting - Click to edit Master...

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