Trade Finance Advisory Services
Factoring provides a working capital solution and operates in much the same way as invoice discounting except this type of funding is a “disclosed” facility which means that your customers will be fully aware of the factor’s existence. Factors typically advance 80% to 85% of the face value of valid invoices. A trade finance mechanism whereby an exporter sells its export receivables (bills of exchange or promissory notes, or simply issued invoices, which the exporter is selling on an open account basis) at a discount. The company purchasing the receivables is called a factor. Factors are normally specialized financial services companies, but many are owned by banks. Normally, after the factor has purchased a receivable, the importer or buyer pays the factor directly. Some factors actually issue the invoices to buyers and, in effect, operate the exporter’s sale ledgers. Some factors operate on a non-recourse basis i.e. they assume the risk of nonpayment. Less frequently, the factor will take recourse to the exporter for all or part of the sums involved in the event of nonpayment or delayed payment by the buyer.
Buyer’s credit is the credit availed by an Importer (Buyer) from overseas Lenders i.e. Banks and Financial Institutions for payment of his Imports on due date. The overseas Banks usually lend the Importer (Buyer) based on the letter of Credit (a Bank Guarantee) issued by the Importers (Buyer’s) Bank. In fact the Importers Bank brokers between the Importer and the overseas lender for arranging buyers credit by issuing its Letter of Comfort for a fee. Buyer’s credit helps local importers access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates.
LC Discount is Letter of Credit Discount. The Letter of Credit from the prime banks or financial institutions is considered as a complete security. A Letter of Credit is a letter from Bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. Let’s consider that the consignee wants to pay you after 90 days after it reaches him. But you want to be paid immediately after the documents are accepted. The banks will offer to pay you on a discount basis, meaning that they deduct a percentage from the value owing to you, which they keep as the cost of discounting; you get paid immediately the value less that the discount
The Bill discounting company (discounter or Bill discounter) will buy the trade debts (also known as accounts receivables, or your sales ledger) of the business at an agreed funding rate. Discounters typically advance 80% to 85% of the face value of valid invoices, for example. A company raises new sales invoices of Rs 1,00,000. Based on the 85% advance it would generate a cash injection of Rs 85,000. This releases working capital that would otherwise be “locked up” and provides immediate cash flow enabling you to pay creditors and use that cash for expansion and growth.
The discounter will then continue to provide you with up to 85% of the value of new sales invoices, normally within 24 hours of you raising them. The other 15% of the value of your sales invoices is passed onto you (minus fees) when the customer pays.
There are some circumstances where over payments can be arranged, however this type of advance will be determined on the basis of how the facility has been maintained and if a successful and trustworthy transactional history has been built up. Once the facility is in place, there is no limit to the amount you can borrow as the level of finance is directly linked to the level of sales. So as your business grows so does the amount of funding available to you. This is in sharp contrast to bank overdrafts, which require regular re-negotiation and arrangement fees.
Invoice discounting facilities are normally made available to established businesses with handsome turnovers which have good systems in place to ensure reliable collections from their customers.
HOW DOES INVOICE DISCOUNTING DIFFER FROM FACTORING?
The fundamental difference between invoice discounting and factoring is that you are responsible for the collection of cash from your debtors. The payments that you receive are paid into a nominee bank account which is administered by the invoice discounter. Where a Confidential Invoice Discounting facility (CID) is in place your customers are unaware that a discounter is funding your business. For any business the potential for bad debt will always be an issue. If you are concerned about bad debts, many discounting companies can provide a facility that will include bad debt insurance protection for additional security.
IS FACTORING OR INVOICE DISCOUNTING SUITABLE FOR MY BUSINESS?
The most suitable candidates for factoring and invoice discounting are growing businesses because the level of funding grows proportionately as turnover increases. However, if you are using traditional loan and overdraft facilities which the bank will not increase, then this type of facility will provide a solution for cash flow.
Although this is a relatively low cost way of increasing your cash flow it would be wise to examine the costs of alternative options before entering into an agreement. Also, debt finance providers tend to prefer firms which receive invoices where it is clear that the goods or services have been delivered and where few payment disputes or credit notes have occurred.
A potentially costly mistake which some companies make when arranging a factoring service is picking the first provider they come across. There are so many providers that simply looking on the internet will probably not get you the best deal.
What VJM & Associates Offers
We provide one of the best Trade Financing Services in the India. Trade Financing is normally associated with all kinds of one-off transactional deals or revolving lines of credit, which may involve over lapping individual type transactions requiring a larger credit line to cater for, continuous business.