PROJECT REPORT

ON

FACTORING

SUBMITTED TO: SUBMITTED BY:

MRS. SHIVANI BECTOR KANISHAK KATHURIA
MBA-II
ROLL NO:6442
 ACKNOWLEDGEMENT

I would like to thank HSBC Ltd. for providing us an opportunity to grow and
enhance our knowledge.

We extend our sincere thanks to Mr. Kunal Bhavra | ALCO, HSBC. His vast
experience in the field of banking helped us to have an overview of the whole
banking sector.

We are also thankful to Mrs. Shivani Bector, Faculty, Management Department,

Mata Gujri College, Fatehgarh Sahib, for her timely guidance and motivation in
each phase of the project.
 CONTENTS

1. ABOUT HSBC BANK ................................................................... PAGE 1-2

2. FACTORING .......................................................................... PAGE 3-5

3. HISTORY OF FACTORING ....................................................... PAGE 6-7

4. CHARACTERISTICS OF FACTORING ....................................... PAGE 8

5. TYPES OF FACTORING .............................................................. PAGE 9

6. ADVANTAGES AND DISADVANTAGES ..................................... PAGE 10-11

7. FACTORING SERVICES BY HSBC ......................................... PAGE 12-15

8. CONCLUSION ................................................................................. PAGE 16-17

9. INTERVIEW SCHEDULE.................................................................... PAGE 18

 ABOUT HSBC

The antecedents of the HSBC Group in India can be traced back

to October 1853 when the Mercantile Bank of India, London
and China was founded in Bombay (now Mumbai). Starting
with an authorised capital of Rs 5 million, the Mercantile Bank
soon opened offices in London, Madras(Chennai), Colombo
and Kandy, followed by Calcutta(Kolkata), Singapore, Hong
Kong, Canton(Guangchow) and Shanghai by 1855. The
following hundred years were in many ways propitious for the
Mercantile Bank. In 1950 it moved into its new head office
building in Mumbai.at Flora Fountain.

The acquisition in 1959 by The Hongkong and Shanghai

Banking Corporation Limited of the Mercantile Bank was a
decisive factor in laying the foundation for today's HSBC
Group. Founded in 1865 to serve the needs of the merchants
of the China coast and finance the growing trade between
China, Europe and the United States, HSBC has been an
international bank from its earliest days.

After the
Mercantile Bank
was acquired by
The Hongkong
and Shanghai
Banking
Corporation,
the Flora
Fountain
building became
and remains to
this day, the
Head Office of
the HSBC Group
in India.

Through the 1990s, HSBC has vigorously developed its role as

one of the leading banking and financial services organisations

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in the world.

Its strategy of
'managing for
value'
emphasises
the Group's
unique
balance of
business and
earnings
between
older, mature
economies and faster-growing emerging markets.

HSBC in India is proud to have retained the Group's pioneering

streak by being an active partner in the development of the
Indian banking industry - even giving India its first ATM way
back in 1987. The organisation's adaptability, resilience and
commitment to its customers have further enabled it to
survive through turbulent times and prosper through good
times over the past 150 years.

HSBC GROUP ENTITIES IN INDIA

 The Hongkong and Shanghai Banking Corporation Limited

(HSBC)
 HSBC Asset Management (India) Private Limited

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 HSBC Global Resourcing / HSBC Electronic Data Processing
(India) Private Limited
 HSBC Insurance Brokers (India) Private Limited
 HSBC Operations and Processing Enterprise (India) Private
Limited
 HSBC Private Equity Management (Mauritius) Limited

FACTORING

Factoring is a service that covers the financing and collection of account

receivables in domestic and international trade. It is an ongoing arrangement
between the client and Factor, where invoices raised on open account sales of
goods and services are regularly assigned to "the Factor" for financing, collection
and sales ledger administration. The buyer and the seller usually have long term
relationships. The client sells invoiced receivables at a discount to the factor to
raise finance for working capital requirement. The factor may or may not accept
the incumbent credit risk. Factoring enables companies to sell their outstanding
book debts for cash.

 The factor operates by buying from the selling company their invoiced debts.
These are purchased, usually with credit protection, by the factor who then will
be responsible for all credit control, collection and sales accounting work. Thus

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the management of the company may concentrate on production and sales and
need not concern itself with non-profitable control and sales accounting matters.

 By obtaining payment of the invoices immediately from the factor, usually up to
80% of their value the company's cash flow is improved. The factor charges
service fees that vary with interest rates in force in the money market.

Factoring is a method used by a firm to obtain Cash 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. The use of
Factoring to obtain the Cash needed to accommodate the firm’s 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
firm’s growth.

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 "customer's bank." Therefore, the trade
off between the return the firm earns on investment in production and the cost of
utilizing a Factor is crucial in determining both the extent Factoring is used and
the quantity of Cash the firm holds on hand.

Factoring is a financial option for the management of receivables. In simple

definition it is the conversion of credit sales into cash. In factoring, a financial
institution (factor) buys the accounts receivable of a company (Client) and pays up
to 80%(rarely up to 90%) of the amount immediately on agreement.

Factoring company pays the remaining amount (Balance 20%-finance cost-

operating cost) to the client when the customer pays the debt. Collection of debt
from the customer is done either by the factor or the client depending upon the
type of factoring. We will see different types of factoring in this article. The
account receivable in factoring can either be for a product or service. Examples
are factoring against goods purchased, factoring for construction services (usually
for government contracts where the government body is capable of paying back
the debt in the stipulated period of factoring. Contractors submit  invoices to get
cash instantly), factoring against medical insurance etc. Let us see how factoring is
done against an invoice of goods purchased.

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 credit sale of goods

Customer Client
Invoice

Pays the balance amount

Pays the amount (In recourse type customer pays through client)
Submit invoice copy

Payment up to 80% initially

Factor

DIFFERENCES FROM BANK LOANS

Factors 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.

From 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 firm’s choice
is between seeking venture capital (i.e., equity) or the lower cost of selling
invoices to finance their growth. The latter is also easier to access and can be

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obtained in a matter of a week or two, whereas securing funds from venture
capitalists can typically take up to six months.

Factoring is also used as bridge financing while the firm pursues venture capital
and in conjunction with venture capital to provide a lower average cost of funds
than equity financing alone. Firms can also combine the three types of financing,
angel/venture, and factoring and bank line of credit to further reduce their total
cost of funds whilst at the same time improving cash flow.

As with any technique, factoring solves some problems but not all. Businesses
with a small spread between the revenue from a sale and the cost of a sale,
should limit their use of factoring to sales above their breakeven sales level where
the revenue less the direct cost of the sale plus the cost of factoring is positive.

The association of factoring with troubled situations accounts for the half truth of
it being labeled 'last resort' financing. However, use of the technique when there
is only a modest spread between the revenue from a sale and its cost is not
advisable for turnarounds..Large firms use the technique without any negative
connotations to show cash on their balance sheet rather than an account
receivable entry, money owed from their customers, particularly when these
show payments being due for extended periods of time beyond the North
American norm of 60 days or less.

HISTORY

Factoring's origins lie in the financing of trade, particularly international trade.

Factoring as a fact of business life was underway in England prior to 1400.[9] 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. 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

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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 it was only in 1949 that 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 larger firms who built their own sales
forces, distribution channels, and knowledge of the financial strength of their
customers, the needs for factoring services were reshaped and the industry
became more specialized.

By the twentieth century in the United States factoring became 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. 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.

Today factoring's rationale still includes the financial task of advancing funds to
smaller rapidly growing firms who sell to larger more creditworthy organizations.
While almost never taking possession of the goods sold, factors offer various
combinations of money and supportive services when advancing funds.

Factors often provide their clients four key services: information on the
creditworthiness of their prospective customers domestic and international;
maintain the history of payments by customers (i.e., accounts receivable ledger);
daily management reports on collections; and, make the actual collection calls.
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The outsourced credit function both extends the small firms effective addressable
marketplace and insulates it from the survival-threatening destructive impact of a
bankruptcy or financial difficulty of a major customer. A second key service is the
operation of the accounts receivable function. The services eliminate the need
and cost for permanent skilled staff found within large firms. Although today even
they are outsourcing such back office functions. More importantly, the services
insure the entrepreneurs and owners against a major source of a liquidity crises
and their equity.

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.[15] 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.

CHARACTERISTICS OF FACTORING

1. Usually, the period for factoring is 90 to 150 days. Some factoring

companies allow even more than 150 days.

2. Factoring is considered to be a costly source of finance compared to other

sources of short-term borrowings.

3. Factoring receivables is an ideal financial solution for new and emerging

firms without strong financials. This is because the 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.

4. Bad debts will not be considered for factoring.

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 5. Credit rating is not mandatory. However, the factoring companies usually
carry out credit risk analysis before entering into the agreement.

6. Factoring is a method of off balance sheet financing.

7. 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.

8. Indian firms offer factoring for invoices as low as Rs. 1000

TYPES OF FACTORING

1. DISCLOSED FACTORING

In disclosed factoring client's customers are notified of the factoring agreement.

Disclosed type can either be recourse or non recourse.

2. UNDISCLOSED FACTORING

In undisclosed factoring, client's customers are not notified of the factoring

arrangement. Sales ledger administration and collection of debts are undertaken
by the client himself. Client has to pay the amount to the factor irrespective of
whether customer has paid or not. But in disclosed type factor may or may not be
responsible for the collection of debts depending on  whether it is recourse or
non recourse.

3. RECOURSE FACTORING

In recourse factoring, client undertakes to collect the debts from the customer. If
the customer don't pay the amount on maturity, factor will recover the amount
from the client. This is the most common type of factoring. Recourse factoring is

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offered at a lower interest rate since the risk by the factor is low. Balance amount
is paid to client when the customer pays the factor.

4. NON RECOURSE FACTORING

In non recourse factoring, factor undertakes to collect the debts from the
customer. Balance amount is paid to client at the end of the credit period or when
the customer pays the factor whichever comes first. The advantage of non
recourse factoring is that continuous factoring will eliminate the need for credit
and collection departments in the organization.

FACTORING COMPANIES IN INDIA

1. Canbank Factors Limited.

2. SBI Factors and Commercial Services Pvt. Ltd

3. The Hongkong and Shanghai Banking Corporation Ltd.

4. Global Trade Finance Limited.

5. Export Credit Guarantee Corporation of India Ltd.

6. Citibank NA, India.

7. Small Industries Development Bank of India (SIDBI).

8. Standard Chartered Bank.

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ADVANTAGES

There are many advantages to factoring, including:

 You can maximise your cash flow as factoring enables you to raise up to
80% or more on your outstanding invoices. An overdraft secured against
invoices could only rise up to 50%.
 Using a factor can reduce the time and money you spend on debt collection
since the factor will usually run your sales ledger for you.
 You can use the factor's credit control system to help assess the
creditworthiness of new and existing customers - this is especially useful if
you do a lot of business with companies whose turnover is lower than £1
million and who do not have to file full returns with Companies House.
 Factoring can be an efficient way to minimize the cost and risk of doing
business overseas.

DISADVANTAGES

Of course, there are disadvantages to factoring and here are the most important
ones to consider. Unless carefully implemented, factoring can have a negative
impact on the way a business operates.

 The factor usually takes over the maintenance of the sales ledger. Customers
may prefer to deal with the company it is trading with rather than a factor.
However, if the factor's techniques are clearly agreed beforehand, there will
usually be no problem.
 Factoring may impose constraints on the way to do business. For non-
recourse factoring, most factors will want to pre-approve customers, which
may cause delays. The factor will apply credit limits to individual customers
(though these should be no lower than prudent credit control would suggest).

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  The client company might only want the finance arrangements and yet it
might feel it is paying for collection services they do not really need.
 Ending a factoring arrangement can be difficult where the only exit route is
to repurchase the sales ledger or to switch factors and that could cause a
sudden shortfall in your working capital.
 The cost will mean a reduction in your profit margin on each order or service
fulfilment.
 It may reduce the scope for other borrowing - book debts will not be
available as security.
 Factors will restrict funding against poor quality debtors or poor debtor
spread, so you will need to manage these funding fluctuations.
 It may be difficult to end an arrangement with a factor as you will have to
pay off any money they have advanced you on invoices if the customer has
not paid them yet.
 Some customers may prefer to deal directly with you.
 How the factor deals with your customers will affect what your customers
think of you. Make sure you use a reputable company that will not damage
your reputation.
 You have to pay extra to remove your liability for bad debtors.

FACTORING SERVICES BY HSBC

HSBC had discontinued providing factoring services in the year 2008 after
providing this service for a period of 5 years. It is now re-launching the product
with a few changes concentrating majorly on MSMEs. This is because SMEs have
lots of potential in terms of volume and employment generation, which is second
only to agriculture.
The experience of recent years shows that while employment in agriculture sector
has been declining, large industries are also experiencing jobless growth. In such a
situation, the main responsibility for job creation rests with unorganized sector
including Small and Medium Enterprises and the Service sector.
HSBC provides finance solutions for all your sales and purchase requirements on
the domestic front, and various export-factoring product services on the
international level.

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The factoring services of HSBC offer a comprehensive receivables and payables
management solution which includes transaction financing, credit protection,
sales ledger administration and payment collection.

At HSBC, ability to be the comprehensive provider of Trade Solutions makes us a

leading player in the Trade & Factoring market in India.

HSBC have dedicated Relationship Managers to provide any assistance that you
may require with respect to your business and your trade needs.

Domestic Factoring
Through this product, our intention is to be an active partner in the management
of your company's supply/delivery chain. Through domestic factoring, we could
look at financing your receivables from your buyers. Additionally we also
undertake to finance your vendor/supplier payments.

Receivables Finance can be structured with on a With Recourse Basis (where we

would be setting up lines on your company) or on a Without Recourse Basis.

Payments of all your service and utility bills could be done through our Vendor
Finance product. These could include for example, courier payments, electricity
bills payments. Through this mechanism we will pay out your service provider on
the due date of the invoice/bill and collect the money from you after a pre-
determined credit period.

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Distributor finance
You can use the Distributor Finance Programme (DFP) to set up a financing and
collection arrangement for your delivery chain.

The credit worthiness of distributors is established independently by HSBC and

credit limits are set up on each distributor. Regular MIS from the bank's end to
both you and your distributors ensures that the sales ledger remains updated at
all times and frees you from reconciliation issues.

Our approach is to become your business partner providing value-added services

over and above the basic funding against your receivables from the channel. This
allows you to focus the efforts of your sales team on actual sales rather than
collection.

Our current portfolio carries a healthy mix of corporate clients across various
industry sectors viz. Telecommunications, Automotive components, FMCG and
Textiles, to name a few.

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, pre-payments,
sales ledger administration, credit protection and collections.

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Step Guide to International Factoring:
1. The importer places the order for purchase of goods with the exporter.
2. The exporter requests the Export Factor for limit approval on the importer.
Export Factor in
3. Turn forwards this request to an Import Factor in the Importer's country.
The Import Factor
4. Evaluates the Importer and conveys its approval to the Export Factor who
in turn conveys
5. Commencement of the Factoring arrangement to the Exporter.
6. The exporter delivers the goods to the importer.

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 7. Exporter produces the documents to the Export Factor.
8. The Export Factor disburses funds to the Exporter upto the prepayment
amount decided and at the
9. Same time the forwards the documents to the Import factor and the
Importer.
10.On the due date of the invoice, the Importer pays the Import Factor, who in
turn remits this
11.Payment to the Export Factor.
12.The Export Factor applies the received funds to the outstanding amount of
the advance against
13.The invoice. The exporter receives the balance payment.

In the international product suite, apart from the existing export-factoring

product, we are now poised to launch import factoring as well. That will make us
the first and only Bank offering the entire bouquet of factoring products to
customers in India.

CONCLUSION

 Factoring should be easy to obtain with minimal paperwork.  The application

process should be simple and seamless for both our clients and their
customers. The decisions should not be based on financials, tax returns or
even equity to debt ratios. Decisions should be made primarily on the invoicing
process and the credit strength of the account debtor (buyer). The factor
should specialize in evaluating and financing accounts receivable and should
be able make a prompt decision within a day.

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 The approval process is should be simple and initial funding should be
provided in 3 to 5 working days. The clients should be able to enjoy the
benefits of prompt service and begin to use their funds within days of
completing an application. The factor should specialize in collateralizing and
financing accounts receivable. The receivables can be pledged as collateral and
the business may draw cash against the eligible accounts receivable at any
time. Accounts receivable financing, also known as factoring is not a loan, so
there is no need to make payments or create debt to the business.

 Factor’s financing programs should accommodate companies with seasonal

or uneven sales patterns or start-up operations with no financial base to rely
upon. Any business can qualify for receivable financing if it generates sales on
open credit terms to customers with financial credit strength.

 Every industry should be evaluated differently because no industry

invoices the same method. Not all factoring companies accept every industry. As
a rule of thumb, the business must sell to a good credit worthy account debtor
(customer), a receivable or invoice that can be verified or has an acceptance
(signed off) by the account debtor. Receivable financing should be available to all
industries that provide services, or deliver products to commercial accounts.

 The factor should recognise how crucial it is to understand the client’s

business plan. The factor should be dedicated and focused on efficient sales
ledger management of the clients’ invoices, which represent specific
obligations arising from the sale of a product or the rendering of services in
the ordinary course of our client’s business. The product or service must have
been delivered or fully rendered, as applicable, and been accepted by our
client’s customer without dispute, offset or other adjustment.

 Whether the business is established or a start-up, the factor, should provide

the essential financial stability through its factoring services, including sales

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 ledger management, to boost revenue and maximise efficiency. Companies
should look to the factor to outsource all internal collections procedures and
facilitate efficient turnover and sales ledger management.

 The factor should attentively manage all aspects of the process from
invoicing to collecting on its client’s behalf, so that his attention can be
focused exclusively on the expansion of his business. The factoring services
should include sales ledger management program, which will help the client
preserve and strengthen your relationship with your customers.

 The factor should be able to mitigate the hassle associated with a loss of
capital through its diligent sales ledger management, which includes verifying
your customer’s credit. Together, sales ledger management and sales ledger
finance, also known as factoring, result in an improvement with cash flow, an
increase in efficiency with collections, a faster turnover of the client’s sales
ledger and a reduction in the number of days the invoice is outstanding.

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 INTERVIEW SCHEDULE

1. What is Factoring? Does your bank provide this service?

2. How does factoring play an important role in collection of debt?

3. How does factoring protect and control credit?

4. Does your bank provide advisory services to your clients?

5. Are all the factoring companies same?

6. What are the qualifications that a business needs to be candidate for factoring?

7. What are the key points that the companies look into, before taking up factoring?

8. What are the advantages and disadvantages of factoring?

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