What is factoring? How it is different from Bank Finance?

Factoring is a package of services providing Integrated Receivable's Management. It is a financial option for credit sales effected on Open Account Terms. Thus while only receivables are funded by Factors, Banks offer package of financial services viz. Working Capital, Term Loan, DPG, L/Cs, Bank Guarantee, etc.

What is the difference between Recourse and Non Recourse Factoring?

In recourse factoring, in the case of non payment of invoices by customers, the Factor will recover the amount advanced from the client. In non recourse factoring, the Factor provides both finance and credit protection. In case of non payment of invoices by customers, the Factor will bear the risk of bad debts.

What is the maximum debt period permitted under factoring?

The maximum debt period permitted under factoring is 150 days inclusive of a maximum grace period of 60 days.

What interest & service charge SBI Factors levies on its clients?

Our charges consist of (i) Finance Charge for purchase of receivables (the finance charge moves in tandem with the market rates and is determined on the basis of credit rating) (ii) Service charges for collection, follow-up, administration, etc. The service charge varies from 0.1% to 2.0% of the invoice value and is determined on the basis of value of invoices submitted to the Factors.

Are associate firms’ sales invoices considered for factoring?

In-house billings are not free from risks, as they may have potential of accommodation for liquidity support. Only where invoices drawn on associates are supported by evidence of genuine movement of goods, can these be accepted for factoring, subject to fulfillment of certain conditions.

Is penal interest levied on overdue bills?

Yes. For delayed payments beyond the approved credit period a penal charge of 1% for the first 30 days and 2% for delay beyond 30 days on the entire outstandings over and above the finance charge is levied.

Do Factors consider financing sick units?

Normally assisting a sick unit or extending similar kind of help as a part of rehabilitation process is not a role expected to be played by a factoring company. It has to function on commercial lines on a small capital base. A good track record will provide only a psychological comfort to the factoring company where recessionary trends in the industry and uncertainties on debt collectability have a consequence on the profitability of the factoring company. Therefore an industry going through a recessionary trend or sick unit is not normally looked on favourably for factoring facility. However, specific cases can be considered on merits.

Whether factoring company can Factor bad debts?

No. Since bad debts are doubtful of recovery and carry with them inherent risk of complete loss, the bad debts cannot be factored.

Whether credit rating is required for availing factoring services & is the credit rating done by SBI Factors?

Credit rating is not required for availing factoring services. However each credit proposal is subjected to credit risk analysis by the Factors before sanctioning limits.

What MIS reports are given to clients? What charges are levied for the services?

Various MIS reports such as Debtors Ageing Analysis, Weekly Statement of accounts, Sales analysis and Statement of outstanding Invoices are given to clients / customers. No charges are levied for the services.

Under factoring normally 80% invoice value is prepaid. What happens to balance 20% of invoice?

Balance 20% is credited to client current account when the invoice is eventually paid by the customer.

Will factoring result in double finance against book debts?

As the debts of the customers approved for factoring are excluded by the client in the statement of book debts submitted to the bank double financing is avoided. This is ensured through a letter of disclaimer obtained from the bankers of the client who relinquish their charge on the debts of the customers selected for extension of factoring facility. The banker should ensure after the execution of disclaimer that the debts of these customers are not included in the book debt statement. Further all the prepayments are made by Factors by means of cheques in favour of the client’ bankers account.

What is the difference between bill discounting & factoring?

Is factoring suitable for SSI?

Factoring is also extended to small scale industries. In fact it is more beneficial to medium and large sized small scale industries who are saddled with the liquidity problems due to delayed realisation of their receivables. Also some units are hesitant to deal with distantly placed buyers and face difficulties in collection which Factor can solve. About 30% of our factoring accounts represent exposure to SSI segment.

Why should Bank Borrowers opt for factoring?

• Factor replaces high cost market credit and enables purchases on cash basis for availing cash discounts.
• Instant finance against each invoice
• Low margin (upto 20%) thereby improving cash flow
• Large credit / grace period
• No penal interest upto grace period
• Low cost
• No upfront recovery
• Finance charge on daily products at monthly intervals
• Each invoice is followed up for payment
• Collection through SBI FAST (CMP)
• MIS reports & sales ledger administration
• Accelerates receivables Turnover, improves operating cycle resulting in more production, larger sales, higher profits and increased ROI.
• Above all lowest response time.

How does SBI Factors take care of customers’ sentiments in collection?

The methods followed in collection of receivables are professional and nonconfrontational. A good rapport is maintained with the customers through periodical visits, communication through telephone, fax, etc. reminders, monthly statements of outstanding invoices, etc. The language used in follow up of overdues is courteous. We also have Bank accounts at various centres in which customers can conveniently deposit invoice payments.

What is the guarantee for improvement in collection period through Factors’ intervention especially where the clients are SSI and customers are reputed industrial giants?

Our past experience has proved that non confrontational and professional, institutional approach is useful in early collection of the payments from the customers, including those from difficult customers. Our follow up through, our officials, communication through telephones, fax, periodical reminders also play important role in improving debt collectability.

Whether factoring company recovers factoring cost from customers?

No

Does factoring company accept invoices drawn on Govt. Dept. / undertaking for factoring?

Invoices drawn on Govt. bodies / departments who are meticulous and prompt in payment are always accepted by us for factoring.

What is the Turnover size to avail factoring?

There is no turnover size stipulated to avail factoring. However, the minimum credit limit considered for factoring is Rs.10 lacs per client.

What is the maximum & minimum value of invoice that is factorable?

There is no maximum value. Minimum value of factorable invoices is Rs.1000/-.

Whether receivables of professionals like C.A., Lawyers & Consultants are factorable?

Normally, the receivables of professionals are non factorable debts as there are elements of advance payments, part payments on which factoring company cannot have effective control. Further the cases of recurring billings are few. As such these debts are not suitable for factoring unless there are regular billings in few customers with definite credit terms.

Whether lease rent receivable is factorable?

Yes

Is factoring available for invoices representing sale of capital goods?

Generally the invoices covering sale of capital goods are not accepted for factoring. However, consumer durable goods or capital goods which are in the form of small components / accessories may be suitable for factoring if there are no warranties. The sale of capital goods is usually non factorable activity as the sales realisation period is very long and there are elements like advance payment, progress payment, part payment, retention money, guarantees, warranties, one time customer, etc. This will make it difficult to track debt collection, control and monitoring.

How the seller is kept advised of payments made by its buyers?

The Factor will send monthly statement of Client Current Account showing payments made by the buyer.

What is Two Factor System?

Bulk of international factoring business worldwide is conducted through two Factor system whereby the payments due from foreign buyers in respect of factored export bills are collected through corresponding Factors in buyers country. The Factor handling collection of export receivables of sellers (exporters) is called Export Factor and the Factor in the foreign buyers country through whom the payment is collected is called Import Factor. The crucial role of the Import Factor is the credit protection offered in respect of factored invoices subject to a limit.

What are the differences between Two Factor System & Credit Insurance?

How quickly exporters’ request for credit lines are given?

Normally our response is within a maximum period of 14 days.

How can factoring help clients to improve their sales volume?

As credit sales are converted to cash sales, the operating cycle period is reduced thereby resulting in improvement of sales volume.

How factoring helps in cost cutting for client?

Factor replaces high cost market credit on purchases and enables raw material purchases on cash basis availing discount. Thus there is cost cutting for clients.