Page 240 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 11: Leasing and Factoring

2. Across national boundaries Notes
3. When notice of assignment has been given to the debtors.
The development of factoring concept in various developed countries of the world has led to
some consensus towards defining the term. Factoring can broadly be defined as an arrangement
in which receivables arising out of sale of goods/services are sold to the "factor" as a result of
which the title to the goods/services represented by the said receivables passes on to the factor.
Hence the factor becomes responsible for all credit control, sales accounting and debt collection
from the buyer(s).
The forfeiting owes its origin to a French term 'a forfait' which means to forfeit (or surrender)
ones' rights on something to some one else. Forfeiting is a mechanism of financing exports:

1. By discounting export receivables
2. Evidenced by bills of exchanges or promissory notes
3. Without recourse to the seller (viz; exporter)
4. Carrying medium to long-term maturities

5. On a fixed rate basis up to 100% of the contract value.
In other words, it is trade finance extended by a forfeiter to an exporter seller for an export/sale
transaction involving deferred payment terms over a long period at a firm rate of discount.

Forfaiting is generally extended for export of capital goods, commodities and services where
the importer insists on supplies on credit terms. Recourse to forfaiting usually takes place where
the credit is for long date maturities and there is prohibition for extending the facility where the
credits are maturing in periods less than one year.

11.9 Mechanics

Factoring business is generated by credit sales in the normal course business. The main function
of factor is realisation of sales. Once the transaction takes place, the role of factor step in to
realise the sales/collect receivables. Thus, factor act as a intermediary between the seller and till
and sometimes along with the seller's bank together.
The mechanism of factoring is summed up as below:
1. An agreement is entered into between the selling firm and the firm. The agreement
provides the basis and the scope understanding reached between the two for rendering
factor service.

2. The sales documents should contain the instructions to make payment directly to the
factor who is assigned the job of collection of receivables.
3. When the payment is received by the factor, the account of the firm is credited by the factor
after deducting its fees, charges, interest etc. as agreed.
4. The factor may provide advance finance to the selling firm conditions of the agreement so
require.

11.10 Discounting of Bills

In addition to the rendering of factoring services, banks financial institutions also provide bills
discounting facilities provide finance to the client. Bill discounting, as a fund-based activity,
emerged as a profitable business in the early nineties for finance companies and represented a
diversification in their activities in tune with the emerging financial scene in India.

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