factoring讲解.ppt

factoring讲解讲解FactoringFactoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Content:oWhat is factoring?oThe history of factoringoFactors Chain International (FCI)oParties to factoring oAdvantages and disadvantages of factoringAdvantages of factoring to the exporterAdvantages of factoring to the importeroDisadvantages of factoringAdditional Content of FactoringoReasons of factoringoHow does international factoring work?oDifferences from bank loansoRisks of factoringoReverse FactoringReasons of factoringoFactoring is a method used by some firms to obtain cash. Certain companies factor accounts when the available cash balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs, such as new orders or contracts; in other industries, however, such as textiles or apparel, for example, financially sound companies factor their accounts simply because this is the historic method of finance. oThe use of factoring to obtain the cash needed to accommodate a firms immediate cash needs will allow the firm to maintain a smaller ongoing cash balance. By reducing the size of its cash balances, more money is made available for investment in the firms growth. oDebt factoring is also used as a financial instrument to provide better cash flow control especially if a company currently has a lot of accounts receivables with different credit terms to manage. A company sells its invoices at a discount to their face value when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its customers bank.“oAccordingly, factoring occurs when the rate of return on the proceeds invested in production exceed the costs associated with factoring the receivables. oMany businesses have cash flow that varies. It might be relatively large in one period, and relatively small in another period. oBecause of this, businesses find it necessary to both maintain a cash balance on hand, and to use such methods as factoring, in order to enable them to cover their short term cash needs in those periods in which these needs exceed the cash flow. Each business must then decide how much it wants to depend on factoring to cover short falls in cash, and how large a cash balance it wants to maintain in order to ensure it has enough cash on hand during periods of low cash flow.How does international factoring work?oWhen export factoring is carried out by members of FCI, the service involves a five or six stage operation.oThe exporter signs a factoring contract assigning all agreed receivables to an export factor. The factor then becomes responsible for all aspects of the factoring operation.oThe export factor chooses an FCI correspondent to serve as an import factor in the country where goods are to be shipped. The receivables are then reassigned to the import factor.oAt the same time, the import factor investigates the credit standing of the buyer of the exporters goods and establishes lines of credit. This allows the buyer to place an order on open account terms without opening letters of credit.oOnce the goods have been shipped, the export factor may advance up to 80% of the invoice value to the exporter.oOnce the sale has taken place, the import factor collects the full invoice value at maturity and is responsible for the swift transmission of funds to the export factor who then pays the exporter the outstanding balance.oIf after 90 days past due date an approved invoice remains unpaid, the import factor will pay 100% of the invoice value under guarantee.Differences from bank loansoFactors make funds available, even when banks would not do so, because factors focus first on the credit worthiness of the debtor, the party who is obligated to pay the invoices for goods or services delivered by the seller. In contrast, the fundamental emphasis in a bank lending relationship is on the creditworthiness of the borrower, not that of its customers. While bank lending is cheaper than factoring, the key terms and conditions under which the small firm must operate differ significantly.oFrom a combined cost and availability of funds and services perspective, factoring creates wealth for some but not all small businesses. For small businesses, their choice is slowing their growth or the use of external funds beyond the banks. In choosing to use external funds beyond the banks the rapidly growing firms choice is between seeking venture capital (i.e., equity) or the lower cost of selling invoices to finance their growth. Risks of factoringoThe most important risks of a factor are:oCounter party credit risk related to clients and risk covered debtors. Risk covered debtors can be reinsured, which limit the risks of a factor. Trade receivables are a fairly low risk asset due to their short duration.oExternal fraud by clients: fake invoicing, mis-directed payments, pre-invoicing, not assigned credit notes, etc. A fraud insurance policy and subjecting the client to audit could limit the risks.oLegal, compliance and tax risks: large number of applicable laws and regulations in different countries.oOperational risks, such as contractual disputes.oUniform Commercial Code (UCC-1) securing rights to assets.oIRS liens associated with payroll taxes etc.oICT risks: complicated, integrated factoring system, extensive data exchange with client.Reverse FactoringoWe can see nowadays that there is a new process developing: the reverse factoring, or supply chain finance. It uses the strengths of the factoring process, but instead of being started by the supplier, it is the buyer that creates the solution toward a factor. That way, the buyer secures the financing of the invoice, and the supplier gets a better interest rate.o Thank you !