The factoring agencies


When we do anything, we always want to thank all those people who have left an impression on our lives and inspired us to greatness. Before we got things I would like to add a few heartfelt words for the people who were part of this project in numerous ways.

My sincere gratitude to subject teacher Ms. Swati Mehta For his valuable guidance, encouragement, useful suggestion, critical evaluation And unending support which helped us accomplishes the project. Although I have expressed our gratitude and heartfelt thanks to all, Who helped me in reaching at this stage, but there might be a few, who'd been left out, I would like to thank all of them for being a constant motivation and inspiration to me.

History of Factoring

The history of factoring can be traced all the way back to the very beginning of written records. It has been with us a very long time. The beginning of factoring dates all the way back 4000 years to the time of Hammurabi and the Mesopotamians. This was when the first written invoices were used and business lending and Government regulation all seem to date from this time. The first evidence of factoring can be found among this ancient stone tablets. The history of factoring is very much the history of business itself.

There is evidence of factoring in every culture where there are remains of written invoices and ledgers. In Rome, the first evidence of the purchase of promissory notes at a discount can be found. There is little doubt that factoring has been around for as long as business has existed. The history of factoring is very much the history of business itself.

As time passed and we moved into the modern era of instant communication and a shrinking world, factoring has continued to play an important role in the business world. The need for cash flow is still a major part of any business and the buying and selling of accounts receivables has remained a viable answer to this problem. The increasing interest rates that marked the 1980's and 1990's led to an increase in the number of new companies turning to the factoring business. Factoring was a way to raise quick capital in a manner that was called "off the balance sheet" financing. Since accounts receivables are an asset account, factoring was a way to raise quick cash without adding the liability of a loan.

What Is Factoring?

Factoring is a fast and flexible method of improving your cash flow and providing working capital for your company. With factoring, you get immediate access to cash that is normally tied up for 30, 60 or 90 days in accounts receivable invoices that will allow you to take advantage of growth opportunities, debt reduction, or provide for daily operating expenses. We can take the example of the Franklin Capital which is dealing in factoring. This diagram can give the clear idea that how factoring process take place.

Unlike a traditional loan, factoring does not put debt on your balance sheet and there are no loans to repay. By selling your accounts receivable to a Factor rather than borrowing from a Bank, factoring simply converts one asset, your accounts receivable, into another asset, cash. You can factor your accounts receivable to improve your cash flow or in addition to existing financing to accelerated your growth. There are no lengthy applications or loan committees, and no financial audit is requested. Factoring can be short term or part of an ongoing financing program. New companies can benefit as well since there is no requirement for a long-term credit history. Best of all, you regain control of your company's financial situation by having a ready source of immediate cash.

Benefits of Factoring

An immediate increase in your working capital. Invoices are paid within 48 hours of issuance.

Receivables flow in on a predetermined schedule. Upon delivery of product invoices we make a wire transfer to your Bank account.

Your attention will be directed to running your business: quality control, customer service, selling, development and opening new accounts

The bothersome issue of collecting accounts receivable will be off your mind.

We send you weekly detailed information on the aging and concentration of your customer's accounts. It will provide you with data to see where potential risks are before they happen.

You will not have to deal with banks or finance companies for working capital.

We don't scrutinize your financials as closely as banks do, rather, we look at the creditworthiness of your customers.

Your only credit limit is the amount of invoices you generate, no more worries about renegotiating your credit limit with banks as your business grows.

We run the risk of your customer failing to make invoice payments.

Absolute and total confidentiality of your financial statements.

Export Factoring

Under Export Factoring, we factor export invoices drawn on overseas buyers and prepay to clients an agreed percentage of the invoice value immediately. Under two-factor system, the factor handling the collection of export receivables of clients (exporters) is called Export Factor (EF) and the factor in buyer's country who undertake collection and credit protection services is called Import factor.

The following steps are involved:

The exporter ships the goods to importer.

The exporter assigns his invoices through the export factor to the import factor who assumes the credit risk. (as per prior arrangement).

The Export factor prepays invoices

The importer pays the proceeds to the Import factor, who transfers the amount to Export factor

The export factor deducts prepayment already made, other charges and pays the balance proceeds to the exporter.

Benefits to Exporters

The import factor offers credit risk protection in case buyer does not pay invoices within 90 days of due date.

ECGC policy cost can be saved. There is reduction is administrative cost as the exporter will be dealing with only one Export Factor irrespective of the number of countries involved.

The exporter can obtain valuable information on the standing of the foreign buyers on trade customs and market potential in order to expand his business.

The following up of receivables by import factor will speed up the collections.

As we provide finance up to 90% on export invoices, the exporter has an improved cash flow and his liquidity improves markedly.

Benifits to Impoters

He can pay invoices in the country locally.

He deals with the local agency, i.e. the Import Factor.

Minimum documentation required.

The cost of Letters of Credit and delay on account of LC's are eliminated. All communication is in his own language.


There are other payment options such as Letter of Credit, Documents against Acceptance (DA), Documents against payment (DP) and Advance payments. However all these options have shortcomings such as the cost and delay involved in LC's , no guaranteed payment in respect of DA bill and buyer not being able to satisfy himself on the quality of products before making payments in respect of DP bill. The two-factor system provides collection services and credit

Major Players

The first factoring company was started by the SBI in 1991 namely Factors and Commercial Ltd. (SBI FACS) followed by Canara Bank and PNB, setting the subsidiaries for the purpose .While the SBI would provide such services in the Western region, the RBI has permitted the Canara Bank and PNB to concentrate on the Southern and Northern regions of the country, for providing such services for the customers. The major players since 1991 are Canbank Factors, SBI Factors and later Foremost Factors. The new entrants in the market include ICICI, HSBC and Global Trade Finance. Canback Factors leads in the domestic market with about .65%-70%of the share.

The Vaghul Committee Report on Money Market Reforms has stressed on the need for factoring services to be developed in India as part of the money market instruments. Many new instruments had already been introduced like Commercial Paper(CP), Pm1icipation Certificates (PC), Certificates of Deposits etc.but the factoring service has not developed to any significant extent in India.

Features and its relevance in the context of the changing financial scenario and the development of financial services industry.

Factoring is essentially a management (financial) service designed to help firms better manage their receivables; it is, in fact, a way of offloading a firm's receivables and credit management on to someone else - in this case, the factoring agency or the factor. Factoring involves an outright sale of the receivables of a firm by another firm specialising in the management of trade credit, called the factor.

Under a typical factoring arrangement a factor collects the accounts on the due dates, effects payments to its client firm on these days (irrespective of whether or not it has received payment or not) and also assumes the credit risks associated with the collection of the accounts. For rendering these services, the factor charges a fee which is usually expressed as a percentage of the total value of the receivables factored. Factoring is thus an alternative to in-house management of receivables.

The complete package of factoring services includes (1) sales ledger administration; (2) finance; and (3) risks control.

Sales ledger administration: For a service fee, the factor provides its client firm professional expertise in accounting and maintenance of sales ledger and for collection of receivables.

Finance: The factor advances up to a reasonable percentage of outstanding receivables that have been purchased, say, about 80 percent immediately, and the balance minus commission on maturity. Thus, the factor acts as a source of short-term funds.

Risk Control: The factor having developed a high level of expertise in credit appraisal reduces the risk of loss through bad debts.

Depending upon the inherent requirements of the clients, the terms of factoring contract vary, but broadly speaking, factoring service can be classified as (a) Non-recourse factoring; and (b) recourse factoring. In non recourse factoring, the factor assumes the risk of the debts going "bad". The factor cannot call upon its client-firm whose debts it has purchased to make good the loss in case of default in payment due to financial distress.

However, the factor can insist on payment from its client if a part of the receivables turns bad for any reason other than financial insolvency.

In recourse factoring, the factoring firm can insist upon the firm whose receivables were purchased to make good any of the receivables that prove to be bad and unrealisable. However, the risks of bad debts are not transferred to the factor.

Legal Aspects

The legal status of a factor is that of an assignee. Once the factor purchases the receivables of a firm and this fact is notified to the customers, they are under a legal obligation to make all remittances to the factor' A customer who by mistake remits the payments to the firm is not discharged from his obligations to the factor until and unless the firm remits the proceeds to the factor. The factoring agreement governs the legal relationship between a factor and the firm whose receivables are to be factored, and is so drawn as to suit the various needs specifying the period of validity of the contract and modalities of termination.

Financial Aspects

Factoring involves two types of costs:

  1. Factoring commission;
  2. Interest on funds advances.

Factoring commission represents the compensation to the factor for the administrative services provided and the credit risk borne. The commission charged is usually 2-4 per cent of the face value of the receivables factored, the rate depending upon the various forms of service and whether it is with or without recourse.

The factor also charges interest on advances drawn by the firm against uncollected and non-due receivables. In the Ul(, it is the practice to advance up to 80 per cent of the value of such outstanding at a rate of interest which is 2-4 per cent above the base rate. This works out to near the interest rate for bank Overdrafts.

The cost of factoring varies, from 15.2 to 16.20 per cent (Singh, 1988), 15.6 to 16.0 percent (SBI Monthly Review, 1989), and the margins in which the factors will have to operate would be extremely narrow. The strategy of factors, therefore, must be to carve out a niche in the services segment namely, receivables management and generate revenues by way of commission rather than concentrate on lending and financing activities where the margins are low.

Factoring offers the following advantages and disadvantages from the firm's point of view:


Firms resorting to factoring also have the added attraction of ready source of short-term funds. This form of finance improves the cash flow and is invaluable as it leads to a higher level of activity resulting in increased profitability.

By offloading the sales accounting and administration, the management has more time for planning, running and improving the business, and exploiting opportunities, The reduction in overheads brought about by the factors administration of the sales ledger and the improved cash flows because of the quicker payments by the customers result in interest savings and contribute towards cost savings.


Factoring could prove to be costlier to in-house management of receivables, specially for large firms which have access to similar sources of funds as the factors themselves and which on account of their size have well organised credit and receivable management.

Factoring is perceived as an expensive form of financing and also as finance of the last resort. This tends to have a deleterious effect on the creditworthiness of the company in the market.

Factoring Agencies in India

Banks do provide non-banking financial services such as housing finance, leasing and hire-purchase, factoring and forfeiting. An amendment was made in the Banking Regulation Act in 1983, whereby banks were permitted to provide these services either through their own departments or divisions or through their subsidiaries. Direct and indirect lending services were provided by setting up merchant banking and mutual funds subsidiaries. Factoring and forfaiting services were of recent origin following the recommendation of the Kalyansundarm Committee, set up by the RBI in 1988.

The Committee was constituted to examine the feasibility of factoring services in India, their constitution, organisational setup and scope of activities. The group recommended setting up of specified agencies or subsidiaries for providing the factoring services in India.

While attempting to assess the potential demand for factoring services in India, the study group under the leadership of Mr. C. S. Kalyansundram estimated the value of outstanding open account credit sales available for financing during 1989-90 at Rs.12,000 corers in respect of SSI and Rs. 4500 crores for medium and large scale sector. Assuming only 50% of the above business will be available for factoring; the aggregate potential demand for factoring was expected to be around Rs. 4000 crores per annum mainly emerging from the SSI and large and medium companies.


In the Indian context, is being viewed as a source of short-term finance. The estimated aggregate potential demand for (finance) would be about Rs 4,000 crores (SBI Monthly Review, 1989). There seems to be a tendency to view primarily as a financing function - a source of funds to fill the void of bank financing of receivables for small-scale industries and others. This attitude is fraught with dangers and could lead to a "catch 22" situation.

In launching service, the thrust should be in the twin areas of receivables management, and credit appraisal should be viewed as vehicles of development of these skills. Since the small-scale sector lacks these sophisticated skills, factors should be able to fill the gap.

Giving priority to financing function would be self-defeating as receivable management would be given the back-seat. It is for the factors to generate the necessary surpluses to mop up the additional resources and then embark on financing function. However, for policy reasons, should these go hand in hand, then the accent should be on receivable management otherwise, these would End up as financing bodies.From the firm's point of view, arrangements offer certain financial benefits in the form of savings in collection costs, reduction in bad debt losses, and reduction in interest cost of investment in receivables.

On the other hand, the firm incurs certain costs, in the form of commissions and interest on advances. Therefore, to assess the financial desirability of as an alternative to in-house management of receivables, the firm must assess the net benefit of this option, using the profit criterion approach. The factors have to establish their credibility in offering better management of receivables and financing at competitive rates to the clients.


A practice of factoring helps small business owners not only to solve their cash problems but also help in increasing sales. Small business owners can also concentrate on their businesses rather than chasing their customers for payments and cash. Factoring practice helps all kinds of small to medium business owners whether they are a small trucking company or any manufacturers.

As a result of invoice factoring, it not only reduces accounting costs but also helps business owners and manufacturers in increased productivity.

There are various types of factoring available. These factoring can be in any industry viz. account receivable factoring, asset based lending, business loans, construction factoring, credit card receivables factoring, distributors factoring, equipment, hard money loans, invoice factoring, manufacturing, medical factoring, purchase order financing, real estate lending, staffing, systems, technology, trucking, verdict funding, wholesalers, etc.

Various agencies provide all these types of factoring. Usually their turnaround time is 24 hours. They provide exclusive online and paperless factoring solutions to the small and medium sized businesses.. With the help of these factoring agencies cash is received in mere 24 hours and no debt is created. Since there is no debt created it increases your credit worthiness which can be used to avail a loan. This also represents a healthy balance sheet and strong financial position.

These agencies also offer higher advance rates which ultimately results in factoring lesser invoices but generating all the required money.

Moreover the factors handle the collection in professional manner thus reduces the collection costs. They also help in processing of invoices by generating invoices online. This further means increased paperless work.

As a result the turnaround time is much shorter than any other means.

Invoice factoring is also known as accounts receivable financing. This practice helps in solving the immediate cash flow problems for small businesses with immediate infusion of money. They also provide a credit facility to small business owners with complete flexibility. This also provides the working capital to the small or medium business owners. This factoring helps in generating working capital without the need of constant renegotiations.

Finally the best part of factoring is that the business ownership remains unchanged as in case of loan, etc. Since there is no loss of business equity, the ownership percentages remain unchanged.



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