Page 200 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 13: Factoring and Forfeiting

the credit is for long date maturities and there is prohibition for extending the facility where the Notes
credits are maturing in periods less than one year.

Caselet Bill on 'Factoring' coming in Budget Session: Minister

he Centre will, in the upcoming Budget session of Parliament, introduce a Bill on
'factoring' so as to provide a comprehensive legal and regulatory framework for
Tsuch services, Mr Namo Narain Meena, Minister of State for Finance, has said.
The proposed legislation would provide adequate protection for major players to further
develop the factoring business in India, Mr Meena said here on Wednesday. Factoring
covers a range of services including receivable financing, sales ledger administration,
accounts receivable collection and management, and credit protection.
What's Factoring?
Factoring business had not made much progress in India due to the absence of a
consolidated legal framework for such business. Although the concept of factoring services
was not very new for India, there are only few players in the market, Mr Meena pointed
out. Mr Meena highlighted that the Department of Financial Services has already prepared
a draft factoring Bill in consultation with various stakeholders including the Ministry of
Micro, Small and Medium Enterprises. The proposed legislation will be conducive to
increasing lending to SMEs, he said. Among the various risks faced by SMEs, which are
largely unorganised, a major one is delay or default of payment by counterparty.

Source: http://www.thehindubusinessline.in

13.2 Mechanics of Factoring and Forfeiting

Mechanics for Factoring

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.

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