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Factoring has a long and rich tradition, dating back 4,000 years. Almost every
civilization that valued commerce has practiced some form of factoring, including the
Romans who were the first to sell actual promissory notes at a discount. The first
widespread, documented use of factoring occurred in the American colonies before the
revolution.
With the advent of the industrial revolution, factoring became more focused on the
issue of credit, although the basic premise remained same. By assisting clients in determining
the creditworthiness of their customer and setting credit limits, factors could actually
guarantee payments for approved customers. Prior to the 1930s, factoring in this country
occurred primarily in the textile and garment industries, as the industries were direct
descendants of the colonial economy that used factoring so specifically.
As time is passing by, and we are moving into the modern era of instant
communication and a shrinking world, factoring plays an important role in the todays
business. The increasing interest rates that marked the 1980's and 1990 are led to an increase
in the number of new companies turning to the factoring business. Factoring is a way to raise
quick capital in a manner that was called "off the balance sheet" financing. Since
accounts receivables are an asset account, factoring is a way to raise quick cash without
adding the liability of loan.
Factoring is one of the oldest forms of business financing. It can be regarded as a cash
management tool for many companies like garment industry where long receivables are a part
of business cycle. Factoring is a service that covers the financing and collection of account
receivables in domestic and international trade.
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It is an ongoing arrangement between the exporter and factor. The exporter sells
invoiced receivables at a discount to the factor to raise finance for working capital
requirement. It bridges the gap between raising an invoice and getting that invoice paid. By
obtaining payment of the invoices immediately from the factor, usually up to 80 per cent of
their value the companys cash flow is improved. The factor charges service fees that vary
with interest rates in force in the money market. The factor operates by buying the invoiced
debts from the selling company. These are purchased, usually with credit control,
collection and sales accounting work. Thus the management of the company may concentrate
on production and sales and need not concern itself with non-profitable control and sales
accounting matters.
Factoring differs from a bank loan in three main ways. First, factoring differs from
traditional bank loans because the credit decision is strictly based on receivables rather than
other factors like how long the company has been in business, working capital and personal
credit score. Secondly, factoring is not a loan; it is the purchase of financial asset. Finally, a
bank loan involves two parties whereas factoring involves three-buyer, exporter and factor.
There is some misconception regarding factoring like people believe factors are a
lender of last resort but that is not true because exporters seeking out factoring are often in
the beginning stages of growth. At first glance, factoring appears to be expensive but does a
lot more; in essence, factoring replaces the accounts receivables and credit department. In the
language of international conventions on factoring, factoring is defined generally as a
contractual relationship involving (a) a Supplier of goods and services, (b) a Factor to which
the Supplier sells or assigns existing or future receivables arising from contracts of sale of
goods or services made between the Supplier and its customers (the Debtors), who are duly
notified of the factoring contract.
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HISTORY OF FACTORING
Factoring as a fact of business life was underway in England prior to 1400, and it
came to America with the Pilgrims, around 1620. It appears to be closely related to
early merchant banking activities. The latter however evolved by extension to non-trade
related financing such as sovereign debt.[31] Like all financial instruments, factoring evolved
over centuries. This was driven by changes in the organization of companies; technology,
particularly air travel and non-face to face communications technologies starting with
the telegraph, followed by the telephone and then computers. These also drove and were
driven by modifications of the common law framework in England and the United States.
Governments were latecomers to the facilitation of trade financed by factors.
English common law originally held that unless the debtor was notified, the assignment
between the seller of invoices and the factor was not valid. The Canadian Federal
Government legislation governing the assignment of moneys owed by it still reflects this
stance as does provincial government legislation modeled after it. As late as the current
century, the courts have heard arguments that without notification of the debtor the
assignment was not valid. In the United States, by 1949 the majority of state governments
had adopted a rule that the debtor did not have to be notified, thus opening up the possibility
of non-notification factoring arrangements.
Originally the industry took physical possession of the goods, provided cash advances
to the producer, financed the credit extended to the buyer and insured the credit strength of
the buyer. In England the control over the trade thus obtained resulted in an Act of
Parliament in 1696 to mitigate the monopoly power of the factors. With the development of
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larger firms who built their own sales forces, distribution channels, and knowledge of the
financial strength of their customers.
By the twentieth century in the United States factoring was still the predominant form
of financing working capital for the then high growth rate textile industry. In part this
occurred because of the structure of the US banking system with its myriad of small banks
and consequent limitations on the amount that could be advanced prudently by any one of
them to a firm.[35] In Canada, with its national banks the limitations were far less restrictive
and thus factoring did not develop as widely as in the US. Even then factoring also became
the dominant form of financing in the Canadian textile industry.
By the first decade of the twenty first century a basic public policy rationale for
factoring remains that the product is well suited to the demands of innovative rapidly growing
firms critical to economic growth.[36]A second public policy rationale is allowing
fundamentally good business to be spared the costly management time consuming trials and
tribulations of bankruptcy protection for suppliers, employees and customers or to provide a
source of funds during the process of restructuring the firm so that it can survive and grow.
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MEANING OF FACTORING
Factoring is a financial transaction and a type of debtor finance in which a
business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at
a discount. A business will sometimes factor its receivable assets to meet its present and
immediate cash needs. Forfaiting is a factoring arrangement used in international trade
finance by exporters who wish to sell their receivables to a forfaiter. Factoring is commonly
referred to as accounts receivable factoring, invoice factoring, and sometimes accounts
receivable financing. Accounts receivable financing is a term more accurately used to
describe a form of asset based lending against accounts receivable. The Commercial Finance
Association is the leading trade association of the asset-based lending and factoring
industries.
Factoring is not the same as invoice discounting (which is called an "Assignment of
Accounts Receivable" in American accounting as propagated by FASB within GAAP).[10]
[2]
receivable" in American accounting) is a borrowing that involves the use of the accounts
receivable assets as collateral for the loan. However, in some other markets, such as the UK,
invoice discounting is considered to be a form of factoring, involving the "assignment of
receivables", that is included in official factoring statistics. It is therefore also not considered
to be borrowing in the UK. In the UK the arrangement is usually confidential in that the
debtor is not notified of the assignment of the receivable and the seller of the receivable
collects the debt on behalf of the factor. In the UK, the main difference between factoring and
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invoice discounting is confidentiality. Scots law differs from that of the rest of the UK, in that
notification to the account debtor is required for the assignment to take place. The Scottish
Law Commission is currently reviewing this position.
DEFINITION
Factoring is a service involving the purchase by a financial organization, called a
factor, of receivables owned to manufacturer and distributors by their customers, with the
factor assuming full credit and collection responsibilities.
Factoring is a service of financial nature involving the conversion of credit bills into
cash.
CHARACTERISTICS OF FACTORING
1
Usually the period for factoring is 90 to 150 days. Some factoring companies allow even
more than 150 days.
Factoring receivables is an ideal financial solution for new and emerging firms without strong
financials. This is because credit worthiness is evaluated based on the financial strength of the
customer (debtor). Hence these companies can leverage on the financial strength of their
customers.
Credit rating is not mandatory. But the factoring companies usually carry out credit risk
analysis before entering into the agreement.
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Cost of factoring=finance cost + operating cost. Factoring cost vary according to the
transaction size, financial strength of the customer etc. The cost of factoring varies from 1.5%
to 3% per month depending upon the financial strength of the client's customer.
For delayed payments beyond the approved credit period, penal charge of around 1-2% per
month over and above the normal cost is charged (it varies like 1% for the first month and 2%
afterwards).
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PROCESS OF FACTORING
The factoring process can be broken up into two partsthe initial account setup and
ongoing funding. Setting up a factoring account typically takes one to two weeks and
involves submitting an application, a list of clients, an accounts receivable aging report and a
sample invoice. The approval process involves detailed underwriting, during which time the
factoring company can ask for additional documents, such as: documents of incorporation,
financials, banks statements, etc. If approved, the business will be setup with a maximum
credit line from which they can draw from. In the case of notification factoring, the
arrangement is not confidential and approval is contingent upon successful notification; a
process by which factoring companies send the business's client or account debtor a Notice of
Assignment. The Notice of Assignment serves to 1) inform debtors that a factoring company
is managing all of the business's receivables, 2) stake a claim on the financial rights for the
receivables factored, and 3) update the payment address usually a bank lock box.
Once the account is set up, the business is ready to start funding invoices. Invoices are
still approved on an individual basis, but most invoices can be funded in a business day or
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two, as long as they meet the factors criteria. Receivables are funded in two part. The first
part is the "advance" and covers 80% to 85% of the invoice value. This is deposited directly
to the business's bank account. The remaining 15% to 20% is rebated, less the factoring fees,
as soon as the invoice is paid in full to the factoring company.
Customer
Client
Invoice
Factor
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A)
B)
ADVANCE RATE
The advance rate is the percentage of an invoice that is paid out by the
factoring company upfront. The difference between the face value of the invoice and
the advance rates serves to protect factors against any losses and to ensure coverage
for their fees. Once the invoice is paid, the factor gives the difference between the
face value, advance amount and fees back to the business in the form of a factoring
rebate.
C)
RESERVE ACCOUNT
Whereas the difference between the invoice face value and the advance serves
as a reserve for a specific invoice, many factors also hold an ongoing reserve account
which serves to further reduce the risk for the factoring company.
This reserve account is typically 10-15% of the seller's credit line, but not all
factoring companies hold reserve accounts.
D)
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E)
SPOT FACTORING
Spot factoring, or single invoice discounting, is an alternative to "whole
ledger" and allows a company to factor a single invoice. The added flexibility for the
business, and lack of predictable volume and monthly minimums for factoring
providers means that spot factoring transactions usually carry a cost premium.
F)
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SPECIALIZED FACTORING
REAL-ESTATE
Since the 2007 United States recession one of the fastest growing sectors in the
factoring industry is real estate commission advances. Commission advances work the same
way as factoring but are done with licensed real estate agents on their pending and future real
estate commissions. Commission advances were first introduced in Canada but quickly made
its way to the United States. Typically how the commission advance process works is they
apply online, sign contracts selling their future real estate commissions at a discount, and then
the funds are wired to their bank account.
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MEDICAL FACTORING
The healthcare industry makes for a special case in which factoring is much needed
because of long payment cycles from government, private insurance companies and other
third party payers, but difficult because of HIPPA requirements. For this reasons medical
receivables factoring companies have developed to specifically target this niche.
CONSTRUCTION
Factoring is common place in the construction industry because of the long payment
cycles that can stretch to 120 days and beyond. However, the construction industry has
features that risky for factoring companies. Because of the risks and exposure
from mechanics liens, danger of "paid-when-paid" terms, existence of progress billing, use of
withholding, and exposure to economic cycles most "generalist" factoring companies avoid
construction receivables entirely. That has created another niche of factoring companies that
specialize in construction receivables.
TRUCKING
Factoring is often used by trucking companies to cover upfront expenses, such as fuel.
Factoring companies that cater to this niche offer services to help accommodate truckers on
the road, including the ability to verify invoices and fund on copies sent via scan, fax or
email, and the option to place the funds directly onto a fuel card, which works like a debit
card. Trucking factors also offer fuel advance programs that provide a cash advance to
carriers upon confirmed pickup of the load.
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FACTORING MECHANISM
A factor provides finance to his client upto a certain percentage of the unpaid invoices
which represent the sales of goods or services to approved customers. The mechanism of the
factoring scheme is as follows:
purchasing
There should
should
be a be
factoring
purchasing arrangement)between
o There
arrangement)
a arrangement
factoring(invoice
arrangement
(invoice
the client (which sells the goods and services to trade customer in credit) and the
by an invoice.
The debt due to the purchaser to the client is assigned to the factor by advising the
trade customers to pay the amount due to the client, to the factor.
The client hand over the invoices to the factor under cover of a schedule of offer
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BENEFITS OF FACTORING
hands
over
invoicespayment
to the factor
cover
of a schedule
of offer
oThe
Theclient
factor
makes
anthe
immediate
uptounder
80% of
the assigned
invoices
and
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2.
3.
4.
5.
6.
7.
Citibank India.
8.
9.
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ADVANTAGES OF FACTORING
LARGER AMOUNTS:
Because accounts receivable factoring is based primarily upon accounts
receivable, small businesses with large amounts of accounts receivable for goods or
services sold to financially strong customers can often obtain a bigger line than
they would qualify for with conventional bank lenders. This is because factoring is
based on the credit strength of your customers. Banks look more at your businesses
credit strength to support their loans. Consequently, often factoring companies can
provide more financing more quickly than banks.
NOT A LOAN:
A factoring company is not making loans. They are purchasing the
accounts receivable with cash. This has the same result of increasing working
capital but many accountants would not show this as a liability on the balance sheet
the way a bank loan would appear. So factoring, instead of borrowing, reduces
balance sheet debt resulting in a lower debt to equity ratio.
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staff up from having to perform these administrative tasks to focus on your product
or service delivery.
DISADVANTAGES OF FACTORING
NOTIFICATION:
Factoring companies typically require that you assign the accounts
receivable to them. This means that your customers accounts payable departments
will be notified to send payments to the factoring companys lockbox. Some
businesses are concerned this will affect their customer relationships but factoring
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FEATURES OF FACTORING:
1.
It is very costly.
2.
In factoring there are three parties: The seller, the debtor and the factor.
3.
4.
Here the full liability of debtor has been assumed by the factor.
5.
Factors has the right to take any legal action required to recover the debts.
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TYPES OF FACTORING
for maintaining the sales ledger and debt collection services and also for the interest for the period on
the amount drawn by the client.
The factor does not have the right of recourse in the case of non-recourse factoring. The
loss arising out of irrecoverable receivables is borne by him, as a compensation which he charges a
higher commission.
FULL FACTORING
This is the most comprehensive form of factoring combining the features of almost all the
factoring services specially those of non-recourse and advance factoring. Full factoring provides the
entire spectrum of services (collection, credit protection, sales ledger administration and short term
finance).
The name of the factor is not disclosed in the invoice in undisclosed factoring although
the factor maintains the sales ledger of the supplier manufacturer. The entire realization of the
business transaction is done in the name of Supplier Company but all control remains with the factor.
He also provides short-term finance against sales invoice.
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Conditions within which the factor will have recourse to the client in case of
non-payment by the trade customer,
Circumstances under which the factor for his services, say for instance, as a
certain percentage on turnover,
Interest to be allowed to the factor on the account where credit has been
sanctioned to the supplier, and
Limit of any overdraft facility and the rate of interest to be charged by factor.
FUNCTIONS
Purchase and collection of debt
Sales ledger management
Credit investigation and undertaking of credit risk
Provision of finance against debts
Rendering consulting services
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vi. Factoring
balance
sheet
is financing.
a method of off
COST OF FACTORING
If your business is growing quickly, turns receivables slowly or operates in an
industry that banks are traditionally reluctant to lend to, you know that factoring may be your
only option to obtain working capital. On the other hand, you may have spent weeks
studying all of your options for financing your business and have decided that factoring might
be right for you because it is easy, has very little paperwork compared to traditional
financing, and is based on the credit of your customers rather than yours. Either way, there
are a few things you need to understand about factoring before you jump in head first.
Keep in mind that there are many benefits to factoring. However the first
thing you need to know about factoring is that it will generally cost your business more than
traditional financing. When a factor buys your invoice at a discount, the discount percentage
may not sound too bad. However, keep in mind that the discount rate multiplied by the turn
ratio equals the effective interest rate you are paying by factoring. For example, if a factor
buys your invoice at a 1.5% discount for 30 days, you are effectively paying 18% interest
(1.5% x turn ratio of 12, which is calculated by dividing 30 into 365 days). And obviously
the higher the discount rate or the shorter the terms, the effective interest you pay increases.
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Third, make sure you understand what type of factoring facility you are
entering into. Generally, your options will be to factor with or without recourse. If you
factor without recourse, once you have sold your invoice to the factor, you are not liable if
your customer fails to make payment to the factor. If you factor with recourse and your
customer fails to pay the factor, you will most likely be obligated to pay the factor for the
invoice or replace it with a new invoice at no cost to the factor. Before entering into a
contract with a factor, be sure you understand if you are entering into a recourse or
nonrecourse agreement and know exactly what the terms are.
Finally, make sure that when you select a factor to work with you are
comfortable with them. Some factors only look out for their own interests and try to take
advantage of those who don't understand the process that well. A good factor will view his
relationship with his clients as a partnership. The relationship has to be a win-win
relationship. A good, reputable factor will not try and hide the true cost of factoring from his
clients and will often times encourage his clients to develop a financial plan so the client
won't have to factor any longer than necessary. A good factor understands that if he treats his
clients with fairness and professionalism, his clients will ultimately recommend him to
others.
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BASICS OF FACTORING
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Domestic factoring
B)
Export factoring
C)
International Factoring
A)
DOMESTIC FACTORING
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EXPORT FACTORING
Our Export Factoring service offers you a complete package to help you
prepayment
of
up
to
90%
of
the
invoice
amount,
immediately.
Under two-factor system, the factor handling the collection of export receivables of
clients (exporters) is called Export Factor (EF) and the factor in buyers country who
undertake collection and credit protection services is called Import factor.
The following steps are involved:
The exporter assigns his invoices through the export factor to the import factor
who assumes the credit risk. (as per prior arrangement).
The importer pays the proceeds to the Import factor, who transfers the amount to
Export factor
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The export factor deducts prepayment already made, other charges and pays the
balance proceeds to the exporter.
100% credit cover, as compared to 80% offered by export credit agencies.(In case
you get the facility from a bank, you will have to go in for an ECA cover.)
C)
INTERNATIONAL FACTORING
In international factoring there are usually two factors. The export factor
looks at financing the exporter and sales administration (presenting invoices at the right
time, collecting payments being the key tasks). The import factor is interested in
evaluating the buyer, collecting the money on time at the same time ensuring that he is
protected against default.
International factoring encompasses all the four services, that is, prepayments, sales ledger administration, credit protection and collections.
Guide to International Factoring:
The importer places the order for purchase of goods with the exporter.
The exporter requests the Export Factor for limit approval on the importer. Export
Factor in
Turn forwards this request to an Import Factor in the Importer's country. The
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Import Factor
Evaluates the Importer and conveys its approval to the Export Factor who in turn
conveys
Commencement of the Factoring arrangement to the Exporter.
The exporter delivers the goods to the importer.
Exporter produces the documents to the Export Factor.
The Export Factor disburses funds to the Exporter upto the prepayment amount
decided and at the
Same time the forwards the documents to the Import factor and the Importer.
The invoice. The exporter receives the balance payment.
and own long term funds in the ratio of 60:40 current cost of bank credit and long term
funds are 12% and 15% respectively.
There has been a consistent rise in the sales of company due to its proactive
measures in cost reduction and maintaining good relations with dealers and customers.
The projected sales for the next year are Rs 800 crore of 50% from last year. Gross
profits have been maintain at a healthy 22% over the years and are expected to continue
in futures.
With escalating cost associated with the in-house management of debtors coupled
with the need to unburden the management with the task so as to focus on sales
promotion, the CEO of Sunlight Industry examine the possibility of outsourcing its
factoring service for managing its receivables. He assigns the responsibility to Anita
Guha, the CFO of Sunlight. Two proposals the details of which are given below are
available for Anitas consideration.
Proposal from Canbank Factors Ltd.: The main element of the proposal
are :
i.
ii.
Advance, 88% and 84% for the recourse and non-recourse arrangement
respectively
iii.
Discount charge in advance 21% for recourse and 22% without recourse
iv.
ii.
iii.
Discount charge upfront, without recourse 21% and with recourse 20%
iv.
The opinion of the chief Marketing manager is that in context of the factoring
arrangement his staff would be able to exclusively focus on sales promotion which would
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Rs 6.4
12.0
15.4
9.0
14.4
Total Cost
57.2
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With recourse
Without recourse
21.9
39.4
13.1
12.9
1.6
2.2
36.6
54.5
With recourse
Without recourse
15.7
31.5
12.0
11.8
1.9
2.5
29.6
Canbank
Indbank
45.2
45.2
Costs
36.6
29.6
Net Benefits
8.6
15.6
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Canbank
Indbank
58.3
58.3
Costs
54.5
45.8
Net Benefits
3.8
12.5
Advice: My advice to the CFO of Sunlight Industries would be to accept the proposal of
Indbank Factors for recourse factoring.
HISTORY
It was established by The Government of India on 12 April
1992 and given statutory powers in 1992 with SEBI Act 1992 being
passed by the Indian Parliament. SEBI has its headquarters at the
business
district
of Bandra
Kurla
Complex in Mumbai,
and
has
The Preamble of the Securities and Exchange Board of India describes the
basic functions of the Securities and Exchange Board of India as "...to protect the
interests of investors in securities and to promote the development of, and to regulate the
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securities market and for matters connected there with or incidental there to".
SEBI has to be responsive to the needs of three groups, which constitute the market:
the investors
SEBI has three functions rolled into one body: quasi-legislative, quasijudicial and quasi-executive. It drafts regulations in its legislative capacity, it conducts
investigation and enforcement action in its executive function and it passes rulings and
orders in its judicial capacity. Though this makes it very powerful, there is an appeal
process to create accountability. There is a Securities Appellate Tribunal which is a threemember tribunal and is headed by Mr. Justice J P Devadhar, a former judge of the
Bombay High Court. A second appeal lies directly to the Supreme Court. SEBI has taken
a very proactive role in streamlining disclosure requirements to international standards.
POWERS OF SEBI
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For the discharge of its functions efficiently, SEBI has been vested with the
following powers:
1. to approve bylaws of stock exchanges.
2. to require the stock exchange to amend their bylaws.
3. inspect the books of accounts and call for periodical returns from recognized
stock exchanges.
4. inspect the books of accounts of financial intermediaries.
5. compel certain companies to list their shares in one or more stock exchanges.
6. registration brokers.
There are two types of brokers:
1. circuit broker
2. merchant broker
SEBI committees
1. Technical Advisory Committee
2. Committee for review of structure of market infrastructure institutions
3. Advisory Committee for the SEBI Investor Protection and Education Fund
4. Takeover Regulations Advisory Committee
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PURPOSE
The aim of this procedure is to ensure that all purchases made by SQA staff
conform to the regulations stated above, and embrace our management principles. An
integral part of this procedure is the provision of a process which facilitates and supports
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SCOPE
Procurement covers the process of acquisition of goods and services (including
consultancy) from third parties. It ranges from initial concept and definition of business
need through to the end of the useful life of a purchased asset or service contract.
POLICY
As a public sector organisation, it is vital that SQA observes the highest
standards of integrity when dealing with all matters concerning the procurement of goods
and services. In particular SQA must:
be fair, efficient, transparent, firm and courteous
publicise procurement contact points and make available as much information
as suppliers need to respond to the tendering process
notify the outcome of tenders promptly and, within the bounds of commercial
confidentiality, debrief winners and losers on request on the outcome of the
tendering process to facilitate better performance on future occasions
achieve the highest professional standards in the award and management of
contracts
respond promptly, courteously and efficiently to suggestions and enquiries
respect the confidentiality of information relating to a tender or contract and
never use the information for personal gain
Not only must SQA be seen to be open and accountable in all its transactions,
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but we must also ensure that we operate fairly and efficiently and make best use of
taxpayers money. This should be achieved through competition unless there are
compelling reasons to allow for a direct award to a supplier; approval must sought by the
Director of Finance prior to the order being placed.
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CONTRACT SPONSOR
The Contract Sponsor (normally a Head of Service) will be accountable to the
Authorising Signatory. The role of Contract Sponsor and the Authorising Signatory may
be the same individual, but regard should be given to the separation of duties at all times.
If there is a conflict of interest then the Procurement team should be contacted.
The Contract Sponsor is the responsible and accountable officer for a given
contract, and owns responsibility for the terms secured and the quality of the contract in
terms of Most Economically Advantageous Tender (Best Value and Fitness for Purpose).
The Contract Sponsor is responsible for managing the contract in terms of
performance, scheduling the appropriate reviews and implementing any adjustments as
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required. The Contract Sponsor will chair contract reviews with support from the
Purchase Agent.
PURCHASE AGENT
The Purchase Agent is responsible for obtaining quotes for all spend below
25,000 for the relevant business area. The Purchase Agent assists the Contract Sponsor,
in the preparation of the specification, including the evaluation criteria. The Purchase
Agent will also support the Contract Sponsor following contract award, in all contract
review meetings with the supplier. The Purchase Agent will be supported by the
Procurement team as required.
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Statistics for factoring volumes are gathered by FCI on a yearly basis with
the assistance of its local members.
There is also an overview of the accumulative total turnover for FCI members
over the last seven years and compares these to the worldwide' figures for all factoring
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companies.
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CHARACTERISTICS OF FACTORING
Usually the period for factoring is 90 to 150 days. Some factoring companies
allow even more than 150 days.
Factoring is considered to be a costly source of finance compared to other sources
of short term borrowings.
Factoring receivables is an ideal financial solution for new and emerging firms
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without strong financials. This is because credit worthiness is evaluated based on the
financial strength of the customer (debtor). Hence these companies can leverage on the
financial strength of their customers.
Bad debts will not be considered for factoring.
Credit rating is not mandatory. But the factoring companies usually carry out
credit risk analysis before entering into the agreement.
Factoring is a method of off balance sheet financing.
Cost of factoring=finance cost + operating cost. Factoring cost vary according to
the transaction size, financial strength of the customer etc. The cost of factoring varies
from 1.5% to 3% per month depending upon the financial strength of the client's
customer.
Indian firms offer factoring for invoices as low as 1000Rs
For delayed payments beyond the approved credit period, penal charge of around
1-2% per month over and above the normal cost is charged (it varies like 1% for the first
month and 2% afterwards).
OBJECTIVES OF FACTORING
To know who are providing the factoring facility.
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REVIEW OF LITERATURE
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RESEARCH METHODOLOGY
RESEARCH DESIGN
The design is the structure of any scientific work. It gives direction and
systematizes the research.
There are two main approaches to a research problem:
Quantitative Research
Qualitative Research
RESEARCH METHOD
Literature Review
DATA COLLECTIONS
PRIMARY DATA
Primary data is basically the live data which is collected on field while interacting
with the customers and is shown as list of questions.
SECONDARY DATAIt have been used for the research like through internet ,newspaper, magazines.
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WORKING OF FACTORING
Factoring provides a fast prepayment against your sales ledger. It allows you, at
a cost, to flexibly increase your working capital and improve cash flow.
Factoring is offered to businesses trading with other businesses on credit terms.
It is not normally available to retailers or to cash traders.
First, importer places an order with the exporter
Secondly, exporter gives the details of the transaction to the factor
Thirdly, exporter dispatches the goods to the importer and sends an invoice well
to pay the amount on due date to the factor
Exporter submits the copy of invoice to the factor
Factor pays the amount to exporter
Customer pays the amount to the factor on due date
Factor pays the balance to client
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which will attract more clients, is almost missing, in India Customers are still not aware
of factoring Services: Factors have not been successful in creating awareness about the
concept of factoring. The difference between factoring and bills discounting is still not
clearly understood. The customers are still not aware of the extra benefits and services
they can enjoy through factoring; they are not demanding these services from factoring
service providers.
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octane growth; just as at the macro level it is suited for a growing economy like India.
There is only one direction in which factoring can go in India: upwards. As the
awareness level about the benefits of factoring increases, factoring will spread its wings
across the length and breadth of the country.
LIMITATIONS
The basic disadvantage of is that it may lead to ruined relations with the
customers especially if factor engages in aggressive or unprofessional practices when
collecting accounts
Cost is another disadvantage, cost involved in factoring agreement may be more
than the cost of other methods of financing available in the business.
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BIBLIOGRAPHY
WEBSITES :http://economictimes.indiatimes.com
http://searchwarp.com
www.wikipedia.com
http://economictimes.indiatimes.com
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