280 likes | 386 Vues
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.
E N D
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. • 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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Continued… • Current Portfolio Short Term Finance – Work Order Financing Page: 19 July 28, 2003
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
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
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
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
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
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
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
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
Thank U Short Term Finance – Work Order Financing Page: 28 July 28, 2003