Discounting, Factoring and Forfeiting

Topics: Accounts receivable, Factoring, Invoice discounting Pages: 22 (5673 words) Published: January 29, 2013
Discounting, Factoring and Forfeiting:


Generally, a trade bill arises out of a genuine credit trade transaction. The seller draws a bill of exchange on the buyer for the invoice price of goods sold on credit. The debtor of goods accepts the same and binds himself liable to pay the amount on due date. In such cases the seller of goods have to wait till due date, for the sale price. It involves locking up of his working capital which is very much needed for smooth running of business or for carrying normal production process. It is the commercial banks enter into as a financier. The commercial banks provide immediate cash by discounting trade bills. They deduct a certain charge as discount charges from the amount of the bill and balance is credited to customer account. Bill of exchange financing is the most liquid one from the banker’s point of view since, in time of emergencies, they can take those bills those bills to RBI for rediscounting. Even if the bill is dishonored, there is a simple remedy. The bank has to simply note and protest the bill and debit the customers account. Bills are always drawn with recourse. Despite many efforts of RBI to promote and develop a good bill market, bill financing forms barely 5 % of the total credit extended by banks. The latest step of RBI is to promote the bill market is launching of the factoring service organizations.


Factors, who are usually subsidiaries of banks or private financial companies, generally rendering the following services: • Purchase the accounts receivable of the seller for immediate cash. • Administer the sales ledger of the seller.

• Collects the account receivable.
• Assume the losses which may arise due to bad debts.
• Provide relevant advisory services to the seller.
For rendering these services, the factor charges a fee that is usually expressed as a percentage of the total receivables factored. Factoring is thus alternative to in-house management receivables.

Modus Operation:

1. Seller invoices buyer in the usual way, only adding a notification that is assigned to and must be paid to factor. 2. Copies of invoices are submitted to factor with schedule of offer, accompanied by the receipted delivery challan or any valid proof of dispatch. 3. Factor will provide pre-payment up to 80% of the invoice value and balance 20% on realisation. 4. Follows up with customers for realisation for payment due. 5. Seller will be informed of factored invoices through monthly statement of account sent by factor.

Functions provided by Factor:

1. Purchase of account receivable: Factor purchases the book debts of its clients. The factor provides advances upto 80% immediately and balance on realisation. Thus, the factors act as a source of short-terms funds.

2. Risk control: The factor having developed a high level of expertise in credit appraisal reduces the risk of loss through bad debts. Moreover, he assumes the losses which may arise due to bad debts.

3. Sales Ledger Administration: For a service fee, the factor provides its client firm professional expertise in accounting and maintenance of sale ledger. The factor also sends periodic statements to client.

4. Collects the accounts receivable: The factor undertake to collect all receivables on behalf the client relieving him of problems and enabling to concentrate on other important functions of his business.

5. Advisory Services: The factor developed a high level expertise in credit appraisal/ dealings and having access to extensive credit information. Advisory services provided are: • Customer’s perception of the client’s product, changing market strategies and emerging trends. • Audit procedure followed for invoicing, delivery and dealing with sales returns. • Provide information of its client with respect to the credit worthiness of customer and credit...
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