Interviews
Adopt factoring to overcome cash flow problems
02 Nov '09
6 min read
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.
The advantages are:
•Factoring helps to turn the receivables instantly into cash
•It provides credit protection for the receivables.
•It helps the business to meet increasing sales demand and expand.
•Factoring helps in saving time as the invoice financing company collects the money itself.
The disadvantages are:
•The basic disadvantage of factoring 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.
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.”
In 2008, the total world volume for factoring increased by 2 per cent, compared to almost 15 per cent in 2007. We can see that Europe has shown an upward trend till 2007, and then a downward trend. If we see the trend of Asia, it is stagnant in initial years i.e. till 2006 and then has shown a little upward trend till 2007.
The advantages are:
•Factoring helps to turn the receivables instantly into cash
•It provides credit protection for the receivables.
•It helps the business to meet increasing sales demand and expand.
•Factoring helps in saving time as the invoice financing company collects the money itself.
The disadvantages are:
•The basic disadvantage of factoring 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.
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.”
In 2008, the total world volume for factoring increased by 2 per cent, compared to almost 15 per cent in 2007. We can see that Europe has shown an upward trend till 2007, and then a downward trend. If we see the trend of Asia, it is stagnant in initial years i.e. till 2006 and then has shown a little upward trend till 2007.
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