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Unit 5: Methods of Financing Exporters and Business Risk Management

5.4.3 Types of Factoring Notes

1. Disclosed
2. Undisclosed

Disclosed Factoring

In disclosed factoring, client’s customers are aware of the factoring agreement. Disclosed factoring
is of two types:

Recourse Factoring: The client collects the money from the customer but in case customer
don’t pay the amount on maturity then the client is responsible to pay the amount to the
factor. It is offered at a low rate of interest and is in very common use.
Non-recourse Factoring: In non-recourse factoring, factor undertakes to collect the debts
from the customer. Balance amount is paid to client at the end of the credit period or when
the customer pays the factor whichever comes first. The advantage of non-recourse factoring
is that continuous factoring will eliminate the need for credit and collection departments
in the organization.

Undisclosed

In undisclosed factoring, client’s customers are not notified of the factoring arrangement. In this
case, Client has to pay the amount to the factor irrespective of whether customer has paid or not.

ECGC introduces innovative non-recourse maturity export factoring.
Export Credit Guarantee Corporation of India Ltd. (ECGC) has announced introduction of its
non-recourse maturity export factoring. The scheme has certain unique features and does not
exactly fit into the conventional mould of maturity factoring. The changes devised are intended
to give the clients the benefits of full factoring services through a maturity factoring scheme,
thus effectively addressing the needs of exporters to avail themselves of pre-finance (advance)
on the receivables, for their working capitals requirements.

One of the major deviations in this regard is the very important role and special benefits
envisaged for banks, under the scheme.
The services provided by ECGC under its export maturity factoring scheme are 100 per cent
credit guarantee protection against bad debts, sales register maintenance in respect of factored
transactions, and regular monitoring of outstanding credits, facilitating due collection in the
due date of recovery, at its own cost, of all recoverable bad debts.
Payments would be received by the exporter, in his account, through normal banking channels.
In the event of non-realisation of dues on factored export receivables, ECGC will promptly
make the payment in Indian currency of an equivalent amount, immediately upon the
crystallization of dues by the bank (exchange rate applicable, as on the date of crystallization).
The Corporation would facilitate easier availability of bank finance to its factoring clients by
rendering such advances to be an attractive proposition to banks. The factoring agreement that
would be concluded by ECGC with its clients has an in-built provision incorporating an on-
demand guarantee in favour of the bank without any payment or compliance or other
requirements to be satisfied by the bank.
The following are the benefits for exporters under the scheme:

Option to give easier credit terms to customers – better protection than an ILC, without
the need to insist on establishing one.

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