Regulation of Bank Finance^397
- Buyer-based Factoring
Buyer-based factoring involves factoring of all the buyerís payables. Thus, the factor
would maintain a list of ëapproved buyersí and any claims on such buyers (by any
seller) would be factored without recourse to the sellers.
- Seller-based Factoring
In this type of factoring the factor takes over the credit function of the seller entirely.
After invoicing his customer (who should be previously cleared by the factor), the
seller submits a copy of the invoice, the delivery, challan, the buy-sell contract and
related papers like quality stipulations and test certificate to the factor who takes over
the remaining operations like reminding the buyer for payment, maintaining his account
and collecting the amount The seller closes his transaction after assigning the debt to
the factor, by treating the transaction as a cash sale. In such a case, the factor is also
able to supply additional information to the management, viz., approved, unapproved
and disputed claims outstanding, sales analysis by area, by salesman, by products, etc.,
excise and sales tax payments and the like.
Modus Operandi of a Factor
Where a firm has decided to factor its receivables, it submits particulars such as list of
customers, amount of the order, terms of sales, etc., in the case of ëapprovedí buyers
and 90% of the invoice less commission to the factor before despatching any
merchandise to its customers. The factor scrutinises each customerís account of the
client firm to make a decision whether to ëacceptí or ëreject.í A decision may also be
taken to ëlimití purchases on account of a single ëbuyer.í The factor returns to the client
the list submitted with these orders. The client is free to supply to a customer, who has
been rejected by the factor at his own risk.
After the goods are despatched, the client firm prepares an assignment schedule and
attaches a copy of invoice and deliver challan. In this assignment schedule, complete
details about the sale, such as the customerís name, address, terms of sale, due dates
and amounts of invoices are recorded. The invoices are stamped before being sent to
the buyer directing him to make the payment to the factor. Sufficient copies of each
instrument are made out in advance so that all the parties involved have records.
The factor scrutinises the assignment schedule to segregate ëapprovedí and ëunapprovedí
buyers. The client companyís account is then credited with the entire amount of the
invoice less commission, in the case of ëapprovedí buyers and 90% of the invoice less
commission, for ëunapproved buyers.í
The factor prepares on ëaccounts currentí at the end of the month to reveal the exact
financial standing the client has with him. The interest charges and commissions are
also recorded therein.