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1. Concept of factoring 2. Numerical problem on recourse and non-recourse factoring. 3. Features of factoring 3. Types of factoring 5. Characteristic of factoring in India
Features of Factoring
MECHANICS OF FACTORING
Customer places an order with seller (the client) Factor and the seller enter into a factoring agreement about various terms of factoring Sale contract is entered into with buyer and the goods are delivered. The invoice with the notice to pay the factor is sent along with.
MECHANICS OF FACTORING
The copy of invoice covering the above sale is to the factor, who maintains the sales ledger. The factor prepays 80% of the invoice value Monthly statements are sent by the factor to the buyer. If there are any unpaid invoices, follow up action is intimated.
MECHANICS OF FACTORING
The buyer settles the invoices on expiry of credit period is allowed. The balance 20% less the cost of factoring is paid by the factor to the client.
NON-RECOURSE FACTORING
In non-recourse factoring, the factor has no recourse to the firm in the event of a customer defaulting on payments. It assumes the risk of bad debts. The factor retains the right recourse, if the customer fails to pay for any reason other than financial distress.
RECOURSE FACTORING
In recourse factoring, the firm bears the credit risk inherent in the receivables assigned to the factor. The client will carry the credit risk in respect of debts sold to the factor
ADVANCE FACTORING
Factor provides an advance against the uncontrolled and not due receivables of a firm.
MATURE FACTORING
The factor does not make any advance payment to the client. The whole payment is made on the date of collection or on the guaranteed payment date.
FULL FACTORING
Full factoring is a merger of non-recourse and advance factoring. Full factoring incorporates a range of services that include collection, credit protection, sales-ledger administration and short-term finance.
NOTIFIED FACTORING
Customer is intimated about the assignment of debt to a factor and also directed to make payments to the factor instead of to the firm
INTERNATIONAL FACTORING
Cross-border factoring involves four parties in the transaction- an exporter, an export factor, an import factor and an importer. The exporter enters into an agreement with the export factor in his country and assigns him export receivables as and when they arise. Payments against factored debts are made in a similar fashion to that of domestic factoring. The export factor enters into an agreement with the factor in the country in which the import factor resides and enters into a contract with him assigning him the tasks of credit checking, sales ledgering and collection, for payment of a stipulated fee.