Factoring is the business of acquisition of receivables of assignor by accepting assignment of such receivables or financing, whether by way of making loans or advances or in any other manner against the security interest over any receivables. Factoring can be both, with recourse and without recourse to the exporter.

Factoring is a service covering the financing and collection of accounts receivable in domestic and international trade. It involves an agreement between a Seller (Exporter) and a Factor wherein the seller agrees to assign its open account receivables which are on credit terms to the Factor who in turn agrees to perform at least two of the following services:

• Financing by way of pre-payments against invoices
• Sales ledger Maintenance
• Collection of Account Receivables
• Credit protection against default in payment by the Buyer

In a ‘with recourse’ facility, the Factor will assess the receivables of an exporter, basis the financial strength of the exporter rather than as buyer risk. Thus, in the event of non-payment by the buyer, the Factor will have a recourse back on the exporter.

However, in case of a ‘without recourse’ facility, the Factor will not have a recourse back on the exporter, unless there is a commercial dispute. In case of a commercial dispute, the Factor has a right of recourse on the exporter, which will be covered under the legal agreements entered into between the exporter and the Factor. Further generally, in a ‘without recourse’ scenario, the Factor may choose to mitigate the credit risk, through a Credit Insurance or an Import Factor.

Advances are made as a percentage of invoice value based on criteria, such as, quality of receivables, number and quality of the buyers and your requirements. Typically, 80 % of invoice value is advanced. However, depending upon the quality of receivables, the advance% may be higher too.

Yes. The process when compared to selling on LC terms, is much more straightforward. The documents required under Factoring are simple and not complicated at all (which is generally the case under LC backed transactions).

Factoring transfers risk from weaker SME exporters to relatively stronger corporate buyers, thereby offering a less-risky option for funding credit sales of SMEs.

Yes. You will need to send a Notice of Assignment to your buyers which is also referred to as Debtor Introductory Letter. Through this letter/notice, the buyer is informed about the factoring arrangement and also about changes in the payment instructions.

On a monthly basis, Exim Finserve will share statement of accounts with the exporters, showing movement of funds. This statement will provide date-wise details of all payments received from the buyers, disbursements by Exim Finserve, factoring charges, Interests etc.

Generally, the buyers take longer to process payments when the terms are open account. Under the two-factor system, involvement of a local correspondent factor, overall helps in reducing the payment time. However, it may increase payment transfer period, by one or two working days, as there will be involvement of correspondent factor.

The exporter can continue to avail pre-shipment / packing credit from its working capital bankers and avail post shipment finance in the form of export factoring from Exim Finserve. The proceeds of the export factoring facility will be remitted to the bank from whom pre-shipment finance is availed by the exporter which will be used for liquidation of pre-shipment finance. Exim Finserve will be able to provide export factoring in USD, GBP and EUR currency.

Factoring is suitable for most trade related transactions which have the following characteristics:

1. Situation of Open Account Sales
2. Involving Continuing Relationship
3. Assignment of Whole Turnover

Broadly factoring involves the following costs:

1. Facility Set-up Fees: Charged on the Funds-in-Use (FIU) limit on annual basis
2. Factoring Charge: Charged on the Turnover
3. Interest: Charged on outstanding FIU and computed on daily balance method

Factoring is an arrangement whereby an exporter selling goods or services on open account terms, invoices the goods/services to a buyer; assigns the invoices to the Factor and receives prepayment up to 80-90% of the invoice value immediately. Thus, converting the exporter's invoice into cash, resulting in the exporter getting an instant access to cash, instead of waiting until the payment is received from buyer. The exporter will, therefore, have a healthier cash flow, which will accelerate growth.

Banks provide financing based on Seller’s Performance, financial strength and pricing depends on the availability of collateral, guarantees, corporate rating, etc.

Factoring is financing against the assignment of receivables, it reduces the working capital burden on the corporates, and is treated as an off-balance sheet exposure.

Financing from banks and financial organization through the traditional means like working capital, bills purchase, letters of credit is an on-balance sheet activity, and as such reflects on the balance sheet.

Factoring takes care of entire receivables management and thereby reducing the inhouse costs related to receivables and recoveries. Factoring is thus not limited to early financing of receivables, but an entire gamut of services from funding, calculations, data management, buyer follow ups, etc.