Factoring

Factoring is a receivables management and financing mechanism which is designed to improve cash flows and cover the credit risk of the seller. Unlike other forms of receivables financing, like bills discounting and forfeiting; factoring involves a continuous relationship between a factor and a seller, to finance and administer the receivables of the latter. Factors are financial companies which pay cash against the credit sales of the client, and obtain the right to receive the future payments on those invoices from the debtors of the client.


Types of factoring


Factor companies in India offer various types of factoring services depending upon the requirement of the client. Various kind of factoring offered include - with recourse and without recourse factoring, domestic and international factoring; and disclosed and undisclosed factoring. A brief description of each of these factoring services is provided below, along with their relative share in the Indian factoring market.


Domestic and International Factoring


Domestic factoring is undertaken for financing of receivables within the country, and involves only one factor. Factoring for cross-border sales transactions is called international factoring. It is also called export or import factoring depending on the location of the factoring customer. The factor either handles the transactions directly, or uses a cooperation partner in the respective country (Two factor arrangement). Over 90% of the factoring done in India relates to domestic transactions. International factoring in India comprises predominantly of export factoring, with a very minuscule contribution from imports. Among the factor companies in India, ECGC is predominantly involved in export factoring, whereas most of the other companies have a greater proportion of domestic factoring than international factoring.


With- recourse and without-recourse factoring


A factoring arrangement can be entered into with recourse or without recourse to the seller. In case of with recourse factoring, the factor has legal recourse to the seller, in case the debtor fails to pay on maturity. Thus the factor acts as an agent for collection of bills and does not cover the risk of customer’s failure to pay debt or interest on it. Alternatively, in non-recourse factoring, the factor does not have recourse to the seller in case of default, and bears the credit risk in case of the buyer’s inability to pay. However, there is generally a limited recourse in case of non-recourse factoring in case of trade dispute between the buyer and the seller regarding quality and supply of goods.

 

Disclosed and Undisclosed Factoring


Under disclosed factoring, the debtor is informed of the assignment of debts to the factor, and is accordingly required to cooperate with the factor for future transactions and collections. Alternatively, under undisclosed factoring, the debtor is not informed of the agreement entered into between the seller and the factor. In this case, the debtor makes payments directly to the seller’s account, and the factor is not directly involved in the debt collection process. Most of the factoring done in India is disclosed, which is also a common practice globally. Under disclosed factoring, the factor sends notice of assignment to all the debtors of the client and factoring is undertaken only for those debtors who accept the assignment. On the other hand, undisclosed factoring is offered by factoring companies only to a limited extent as it involves high risks and necessitates due diligence on the client as well.


Major players


India still has limited number of players engaged in providing factoring services. Most of the players engaged in providing factoring services currently, are

 

  • Specialized financial institutions

    ECGC

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