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Factor’ has been derived from the Latin word ‘Facere’ which means ‘to make or to…
Understanding Nuances of Factoring Series 1
Factor’ has been derived from the Latin word ‘Facere’ which means ‘to make or to do. As per FCI, or Factors Chain International, is a global network of leading factoring companies that adhere to high standards and best practices in the factoring industry it is Factoring is based on the concept of selling (and/or assigning) a business’s outstanding receivables (=sales invoices) to the Factor and receiving a set of trade related services
It seems to be the need of the hour as the export target set by India is $1 Trillion by 2030; hence, the trade finance requirement will be substantial. However, the traditional trade finance system has its limitations, and there is a pressing need for alternatives to address the looming shortfall in export finance. The system has been operating within a confined credit limit, limiting its capacity to support the ambitious export goals. Therefore, there will be means and ways to look at innovative solutions to fuel the export finance requirement that is needed to achieve this target.
In order to meet the soaring demand for trade finance for export, traditional banking systems might find themselves stretched thin, unable to cope with the sheer magnitude of funding required to reach the $1 Trillion goal. As a result, exploring alternative financing options such as factoring and other innovative financial instruments becomes imperative. These alternatives can play a pivotal role in bridging the financial gap and ensuring that businesses have access to the necessary capital to drive their export initiatives.
Usually people gets confused between Bill Discounting, as well as Factoring. Both seems similar, as they provide post shipment finance be it export or domestic however there is a substantial difference between the two. Lets see how similar they are and how different they are
Similarities
- Both provide short-term finance.
- Both get the account receivables discounted, which the client would have otherwise received, from the buyer at the end of credit period
| Differences | |
| 1. It is a provision of finance against bills. | 1. Factoring renders all services like maintenance of sales ledger, advisory services, etc in addition to the provision of finance. |
| 2. Advances are made against the bills. | 2. Trade debts are purchased by assignment. |
| 3. The drawer undertakes the responsibility of collecting the bills and remitting the proceeds to financing agency. | 3. Factoring undertakes to collect the bills of the client. |
| 4. Bills discounted may be rediscounted several times before the maturity. | 4. Debts purchased for factoring cannot be rediscounted, they can only be refinanced. |
| 5. Bill discounting is always with recourse, i.e. in case of default the client will have to make good the loss. | 5. Factoring may be with or without recourse. |
| 6. Bill financing is individual transaction oriented i.e. each bill is separately assessed on its merits and got discounted purchased. | 6. In factoring, bulk is provided against several unpaid trade generated invoices in batches. It follows the principle of ‘whole turnover’ |
| 7. Bill finance is always ‘In Balance Sheet’ financing i.e. both the amounts of receivables and bank credit are reflected in the balance sheet of the clients as current assets and current liabilities respectively. This is because of the ‘with recourse’ nature of the facility. | 7. In full factoring services facility is ‘off balance sheet’ arrangement, as the client company completes his double entry accounting by crediting the factor for consideration value. |
| 8. The drawee or the acceptor of the bills is in full knowledge of the bank’s charge on the receivables arising from the sale of goods and services | 8. Factoring services like ‘undisclosed factoring’ are confidential in nature i.e. the debtors are not aware of the arrangements. |
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