How does it work?
The above graph represents the model of factoring and the
way it is being done.
- 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
Obstacles
According to World Bank, various taxes, legal and regulatory
obstructions will block factoring services. "Factoring generally requires
good historical credit information on all buyers; if unavailable, the factor
takes on a large credit risk." It also points out that fraud represents
another big problem in this industry (e.g. bogus receivables and non-existent
customers).
Mr. Laxman N. Sankade, Managing Director, Canbank Factors
Ltd, said: "For factoring to develop, it is imperative that an enabling
legal environment be created and the Factoring Bill be passed in Parliament. It
is also seen that a lot of weak companies would actually be able to tide over
their liquidity problems if the receivables are acceptable to the factoring
companies and which could be factored."
According to Mr. Basab Majumdar, Head-Factoring and
Receivables Finance, India, HSBC, "Assignment of debt is still a
cumbersome process and involves stamp duty which again is a State level subject
and there is no uniformity in the rates of stamp duty across States. Moreover,
every time a debt has to be assigned to the factor and stamp duty paid on the
transaction, which has the potential of making the proposition expensive for
the client. Most of the developed countries have implemented clear laws related
to assignment/transfer of debt, bankruptcy, debt recovery, etc. Additionally in
India, access to information on companies, their repayment performance with
the banking system, etc is thinly available, which results in lack of
information to decide on credit."
