1 / 28

Presentation On

Presentation On. Factoring of Accounts Receivable. By: Shamim Reza Date: August 11, 2003. Short Term Finance – Work Order Financing. Page: 1. July 28, 2003. Factoring of Account Receivables. Financing against invoices raised by the supplier after making the delivery successfully.

cosmo
Download Presentation

Presentation On

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Presentation On Factoring of Accounts Receivable By: Shamim Reza Date: August 11, 2003 Short Term Finance – Work Order Financing Page: 1 July 28, 2003

  2. Factoring of Account Receivables • Financing against invoices raised by the supplier after making the delivery successfully. • Revolving Short Term Facility • Permanent Assignment of Payment • Financing against invoices • Post-delivery Financing Short Term Finance – Work Order Financing Page: 2 July 28, 2003

  3. Mechanism Buyer Client 3 2 1 4 7 6 5 Mechanism IDLC • Client assigns the payment against delivery to IDLC • Client makes delivery to the Buyer against WO • Client submits delivery challan and bill/invoice to Buyer • Client submits delivery challan and bill/invoice to IDLC • IDLC makes advances to Client against the submitted invoices • Buyer makes payment to IDLC • IDLC reimburses the balance amount Short Term Finance – Work Order Financing Page: 3 July 28, 2003

  4. SUPPLIER / CLIENT BUYER / CUSTOMER BUYER / CUSTOMER BUYER / CUSTOMER BUYER / CUSTOMER BUYER / CUSTOMER Portfolio of Customers • Sales Ledger Audit • Permitted Limit for each customer • Permitted Credit Term for each customer Short Term Finance – Work Order Financing Page: 4 July 28, 2003

  5. Ave. Monthly Balance Net Collection Ave. Monthly Sales Ave. Monthly Receivables Ave. Deduction Ave. Receivable Turnover in days Sales Ledger Audit (SLA) • Party ledgers of last one year – customer wise • We look for • Relationship since • Monthly sales • Monthly collection • Deductions (%) • Sales return (%) Short Term Finance – Work Order Financing Page: 5 July 28, 2003

  6. 1. Assignment of Payment • Assignment Letter from the Client • STF Agreement between client and IDLC • Taking working capital financing from IDLC • Make all payments to IDLC in the following manner: • “IDLC A/C#559 (A/C: Client Name)” • Irrevocable until further notice from IDLC • Request for confirmation letter • payment as per request Short Term Finance – Work Order Financing Page: 6 July 28, 2003

  7. Continued… • Assignment Letter from IDLC • STF Agreement between client and IDLC • Taking working capital financing from IDLC • Make all payments to IDLC in the following manner: • “IDLC A/C#559 (A/C: Client Name)” • Irrevocable until further notice from IDLC • Request for confirmation letter • payment as per request • Meeting with the customer/buyer • Receiving payment confirmation from the buyer Short Term Finance – Work Order Financing Page: 7 July 28, 2003

  8. 2. Delivery 3. Submission of Invoices/bills • The client submits invoices along with • Delivery challan • VAT challan (if any) • The Asst. Officers/ Officers check the submitted Invoices and Challans Check list Short Term Finance – Work Order Financing Page: 8 July 28, 2003

  9. 3. Financing Available Fund Inv. Amount Ad. Payment % X = ] [ - - Inv. Amount = Dis. Balance X Ad. Payment % Current A/C Balance • Due Invoices = Invoices outstanding till maturity (till the end of credit term) • Overdue = Invoices outstanding beyond maturity, but not exceeding the • grace period • Overdue Disapprove = Invoices outstanding beyond grace period • Sales Ledger Disapprove = Sales Ledger Balance – Permitted Limit • (if SLB > Permitted Limit) Short Term Finance – Work Order Financing Page: 9 July 28, 2003

  10. 4. Collection against invoices • Payment in the name of IDLC • Invoice wise payment or lump sum payment • Allocation of collected amount • Checking – AIT deduction? other deduction? 5. Reimbursement of Balance Amount • Reimbursement amount = Invoice amount x Balance % - New Disapprove Balance • On Line Approval (Disbursement memo) • Issuing cheque in favour of the client Short Term Finance – Work Order Financing Page: 10 July 28, 2003

  11. Major Terms & Conditions • Credit Limit revolving limit [general and customer specific] • client requirement & SLA data • client’s forecast • Expiry – 1 year from Agreement; Renewable • Maximum Credit Term [general and customer specific] • client requirement & SLA data • client’s forecast Short Term Finance – Work Order Financing Page: 11 July 28, 2003

  12. Continued… • Service Charge (0.4%-0.7%) • calculated on the gross invoice amount • depends on bargaining power • should be enough to cover service cost • fair rate so that client retention rate is improved • realized at the point of disbursement against invoices loaded in the loan a/c immediately after purchasing invoices Short Term Finance – Work Order Financing Page: 12 July 28, 2003

  13. Continued… • Factoring Discount (14.5%-15.75%) • depends on bargaining power • calculated on daily loan balance • should cover IDLC’s cost of fund • should be fair rate so that client retention rate is improved • realized at each month end loaded in the loan account • Expected Effective Rate • varies from client to client • usually around 17%-18% Short Term Finance – Work Order Financing Page: 13 July 28, 2003

  14. Book Keeping • Sales Ledger Control Account • Current Account (Loan Account) • For Client • For Each Customer Short Term Finance – Work Order Financing Page: 14 July 28, 2003

  15. Security • Mandatory • Assignment of payment (permanent assignment) • Floating charge on receivables (filing with RJSC in case of Ltd. Company) • Personal guarantee from Directors • Security cheque covering full sanctioned limit • Recourse on the client • Optional • Corporate guarantee (if necessary) • Cash security (% of sanctioned limit) • Equitable/registered mortgage on property • Any other security Short Term Finance – Work Order Financing Page: 15 July 28, 2003

  16. Documentation • Sanction letter • Loan agreement • Demand promissory note • Client promises to pay the sanctioned amount at given int. rate • Letter of revival • Acknowledges the liability for payment of promissory note • Letter of continuity • Agrees to execute DP note and other relevant documents • Undertakes to remain liable on DP note and other docs • Undertaking • Declares that they will not obtain any financing from any person(s) and/or institution(s) against the assignment of receivables of the client without prior consent of IDLC. Short Term Finance – Work Order Financing Page: 16 July 28, 2003

  17. Continued… • Letter of guarantee (Joint/Several) • Extract of the Board resolution (if limited company) • Notarised Irrevocable general power of attorney • Client empowers IDLC to collect, receive, deposit, encash, transfer the proceeds against all receivables of the client arising out of the business transactions with their customers • Deed of floating charge on receivable • Client agrees to secure loan, amongst other means, creating a priority floating charge on all book debts (receivables) Form XIII duly filled up and signed by the client • Corporate guarantee (if any) • Deed of Mortgage & Undertaking (if any) • Any other documents relating to any other collateral Short Term Finance – Work Order Financing Page: 17 July 28, 2003

  18. Marketing • Target Group • Small and medium clients • Minimum monthly turnover of Tk.1.0 million • Frequent supply to few fixed customers • Considerable invoice size • Working capital crisis – growth prospect (cash purchase – credit sale) • Customers/buyers with consistent payment performance • Suppliers with good reputation Short Term Finance – Work Order Financing Page: 18 July 28, 2003

  19. Continued… • Current Portfolio Short Term Finance – Work Order Financing Page: 19 July 28, 2003

  20. Continued… • How to Market • Assessing the need of the prospect for working cap • Convincing the prospect that Factoring will improve cash flow and thus will increase the business volume • Marketing the services – ‘follow up’ and ‘reporting’ • IDLC’s experience in this field • IDLC’s network – makes assignment process and collection and follow up job easier • Need basis financing – small amount and less probability to be used otherwise • Our service – prompt payment • Flexibility – limit enhancement, increasing credit terms Short Term Finance – Work Order Financing Page: 20 July 28, 2003

  21. Continued… • No commitment fee – cab be cancelled anytime if not satisfied • Ensuring confidentiality • Package sale – advantages: security, less costly • Information Required • MEMART, Form XII, financial statements, liability positions, corporate profile, Directors’ profile, etc. • Complete Sales Ledger (past one year) Short Term Finance – Work Order Financing Page: 21 July 28, 2003

  22. Problems Encountered • While marketing • What is IDLC • Reluctance to open their books (sales ledger) • Interest rate – competing with banks • Competing with traditional short term credit lines like CC, OD – hastle free • Reluctance to assign payment/ involve customers • Reluctance to pay service charge • Reluctance to provide security – only assignment of payment • Interested to take financing against bad accounts only • Reluctance to give security cheque Short Term Finance – Work Order Financing Page: 22 July 28, 2003

  23. Continued… • During Assignment (with Buyer) • Difficult to get appointment – reluctance to meet IDLC (third party) • What is IDLC – to customers • Does IDLC have permission for WO financing • Payment can not be assigned only to ‘NBFI’ • Time consuming – assignment for each WO, outside Dhaka • Policy does not permit assignment • Difficulty in obtaining confirmation letter (in case of MNCs approval of parent company is required) Short Term Finance – Work Order Financing Page: 23 July 28, 2003

  24. Continued… • During Financing • Does not understand the process of adjustment against ‘Disapproved Bills’ • Request for financing against fresh bill even when negative financeable amount • During Followup (with Buyer) • Reluctance to talk to IDLC people – specially in the beginning • Non-availability of contact person • Number of phone calls for a single collection • Difficulty in obtaining complete information • Contact person does not know • Does not want to disclose to us (asks the client to contact) Short Term Finance – Work Order Financing Page: 24 July 28, 2003

  25. Continued… • Change of contact person • Pressure from the client • During Collection • Non availability of the contact person, even after confirming over phone • Lack of co-operation (does not provide invoice number, lump sum payment) • Fixed schedule for cheque hand over – some times difficult to make it within the give time frame • Must deposit the cheque within the banking hour (pressure from the client) • Collection from places outside the city Short Term Finance – Work Order Financing Page: 25 July 28, 2003

  26. Risks Comparatively risk is low because of post delivery financing. However, most commons risks are: • Direct payment – intentional / unintentional • Arrangement between buyer and seller • Fake invoices – false delivery • Forgery – short supply • End of relationship between client and customer Short Term Finance – Work Order Financing Page: 26 July 28, 2003

  27. Question ? & Answer For more details go to: All public folder>Client Service (ST)>Customized>Operational Manual Short Term Finance – Work Order Financing Page: 27 July 28, 2003

  28. Thank U Short Term Finance – Work Order Financing Page: 28 July 28, 2003

More Related