Quality services and products businesses always have the scope to grow the business. It raises to an exponential level. While expanding the business, there is always a requirement for good resources and financial resources. When it comes to financial resources most businesses need working capital support. The working capital support without any collateral adds real value to the business. There are many financial instruments that work well for the working capital requirement. Factoring Service is one such financial instrument.
Traditionally, most of the working capital financial instruments were secured where it was essential to have a mortgage or some kind of property with the financial institutions.
Earlier manufacturing and agriculture sectors were major contributors to the economy. However, over the period the Service sector has taken the major pie of Indian GDP. Thus, when it comes to the Service sector or Service Industry, there are no fixes required by the businesses nor those created. The service sector industry always focuses more on creating intellectual capital than fixed assets. And intellectual property is not mortgaged by the Indian Debt Market to lend the fund to the businesses. There is always a gap in this.
Every business takes a particular number of days to convert its service or raw material to cash, and that is the reason every business needs a credit period, may it be a big or small business. And when the service or the raw material is sold on credit, that party becomes the debtor of the business. Factoring is the service where a business sells its debtors to the factoring company. So, generally, factoring companies take charge of the debtors and release the funds to the company. Thus, factoring is one of the best unsecured working capital instruments.
In the factoring process, there are three parties involved. One company (who sells the debtors), the second party is the Factor, (who purchases the debtors), and the third party is the client, (the debtor). The whole process of factoring rotates among these three stakeholders of the process.
Factoring is mainly useful where the customers (buyer) require the credit period and the company (seller) cannot afford to give the credit period. Let us say there are 3 parties – Company (Mr. A), Customer (as Mr. B), and Factor Limited (Mr. C). When Mr. A sells the goods or services to Mr. B, Mr. B agrees to pay Mr. A after 60 days from the date of invoice acceptance. Once Mr. B receives the invoice issued by Mr. A, Mr. B acknowledges the same to Mr. A. Mr. A conveys the same to Mr. C. Mr. C checks the authenticity of the invoice and makes the payment of 80% to 90% of the invoice amount to Mr. A. And remaining 10% to 20% will be transferred to Mr. A once Mr. B makes the full payment of the invoice to Mr. C.
There are many reasons why one should opt for factoring services. Below are a few of them –
Understand the process of factoring funding from the case study.
No. The factoring service does not require any kind of fixed asset to be mortgaged. So this helps all kinds of industries. Capital and Non-capital intensive industries.
The rate of interest varies as the geo limit. For domestic factoring, the rate of interest will be around 10–12% pa. And for the international client, the rate of interest can be around 4–6% pa (LIBOR+Spread).
Generally, under CC there is always a charge on the debtors of the company. However, under factoring, a factor can take the opinion from the existing core banker and can factor the debtors. So factoring can be clubbed with any working capital facilities you have opted for.
No, there is not such requirement or obligation to change the existing banker.
Yes. In fact, you will get more benefits for international clients, as you will get exposure to LIBOR+Spread (generally this will be around 3–5% pa).
Yes, It helps to get more benefits for indian clients, as you will get exposed to LIBOR+Spread (generally this will be around 3–5% pa).
No. Under factoring, there are no changes in the payment terms. There are only a few changes like the account where to transfer the funds. So there are no disturbances to the credit terms between you and the client.
Though the factoring service in India is complex in nature, you do not have to worry about this. You just have to contact Terkar Capital and they will take care of end to end execution of the whole process. Terkar Capital is the best investment firm in India, working professionally for raising debt finance for the companies. They understand the complex structure of the company including working capital cycles, statutory compliance, and legal complications.
Learn more about factoring funding.
Terkar Capital is one of the professional and best investment banking firms in India. We work for arranging funds for businesses, be it secured or unsecured funding. In factoring Terkar Capital understands the customer and checks the feasibility of how well factoring can suit your business. Once we analyze and confirm the feasibility of factoring, we search for the best suit factor for your debtors and execute the whole process smoothly. We do not factor in the debtors directly.