factoring and Cp

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FACTORINGcommercial paper

Aswathy Mohan .M

S2 MBA


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Factoring may be defined as contract between the supplier ofgoods / services and the factor under which the factor agreesto perform at least two of the following functions

a) To finance the assigned book debts (receivables)b) To maintain accounts relating to receivables.

c) To collect book debts

d) To provide protection against default in payment by

debtors.e) To provide credit administration services to the clients to

decide whether or not and how much credit should beextended to the customers.


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Factoring is a service involving the purchase by afinancial organization , called a factor, of receivablesowed to manufacturers and distributors by theircustomers, with the factor assuming full credit andcollection responsibilities

- Robert W . Johnson


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Parties to Factoring ContractThere are 3 parties involved generally in a factoringcontract as follows:

1) Buyer of goods who has to pay for goods bought oncredit terms

2) Seller of goods who has to realize credit sales frombuyer

3) Factor who acts as agent in realizing credit salesfrom buyer and passes on the realized sum to sellerafter deducting his commission


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TYPES OF FACTORINGi) Non-recourse Factoring (Old line Factoring)

Under non recourse factoring factor assumes the

risk of bad debts and charges higher commission forand advances cash upto 80/90% of book debtsimmediately.

ii) Recourse Factoring

Under this, factor does not assumes the risk ofbad debts and charges lower commission for andadvances cash upto 70/80% of book debts


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iii) Advance Factoring

Under advance factoring, factor advances cash

against the book debts due to client immediately.iv) Maturity Factoring

Under this, the factor makes the payment onmaturity


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v) Finance Factoring

Under this, the factor simply finances the book

debts against bulk either on recourse or withoutrecourse and the client continues to administer andoperate sales ledger

vi) Non-notification Factoring

Under this, the notice of assignment orreceivables is not given to the debtors. But the factorperforms all his function without a disclosure to thecustomer that he owns the book debts.


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Factoring CommissionThe commission charged by the factor for providingfactoring services is known as factoring commission. It isusually expressed as a percentage of face value ofreceivables factored. In india, it ranges between 2.5 to 3percent. The commission is expected to be lower forrecourse factoring since the factor does not assume therisk of bad debts . The commission is expected to behigher for non-recourse factoring since the factorassumes the risk of bad debts


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Advantages of Factoring Eliminating of trade discounts

Prompt payments and credits

Improves scope for operating leverage

Reduction of administrative cost and work done Increase in return to the client

Improvement in liquidity

Provides insurance against bad debts

It is neither a loan nor a deposit but facilitate liquidity It avoid increased debts

Current assets of efficiency managed their reducingworking capital requirements.


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Disadvantages Image of the client may suffer as engaging of a

factoring agencies not considered as a good sign ofefficient management.

Factoring may not be much use where companieshave nation wide network branches

Financial evaluation may not be accurate

If the client has cheaper means of finance and credit,factoring may not be useful


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COMMERCIAL PAPER


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Commercial paper is short term issuance promissorynote issued by a company in a private sector or publicsector at such discount/interest on face value as maybe determined by the issuing company and isnegotiable by endorsement and delivery. EachCommercial paper will bear a certificate from bankverifying the signature of executants.


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Features of Commercial paper1) Commercial paper is a short-term money marketinstrument comprising usance promissory note with afixed maturity.

2) It is a certificate evidencing an unsecured corporate debtof short term maturity.

3) Commercial paper is issued at a discount to face valuebasis but it can also be issued in interest bearing form.

4) The issuer promises to pay the buyer some fixed amounton some future period but pledges no assets , only hisliquidity and established earning power, to guaranteethat promise.

5) Commercial paper can be issued directly by a companyto investors or through banks/ merchant bankers.


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Advantages of Commercial Paperi) Simplicity

The advantage of commercial paper lies on its

simplicity. It involves hardly any documentationbetween the issuer and investor.

ii) Flexibility

The issuer can issue commercial paper with the

maturities tailored to match the cash flow of thecompany


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iii) Diversification

A well rated company can diversify its source offinance from banks to short term money markets at

somewhat cheaper cost

iv) Easy to raise long term capital

The companies which are able to raise funds throughcommercial paper become better known in the financial

world and are thereby placed in a more favourable positionfor raising such long term capital as the may, from time totime , require. Thus there is an inbuilt incentive forcompanies to remain financially strong


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v) High Returns

The commercial paper provides investors with

higher returns than they could get from the bankingsystem

vi) Movement of funds

Commercial paper facilitates securitisation of

loans resulting in creation of a secondary market for thepaper and efficient movement of funds providing cashsurplus to cash deficit entities


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THANK YOU

factoring and Cp

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