Factoring in Finance

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Questions and Answers

What is one of the main services provided by a factor in factoring?

Long-term loan agreements

Collection of the client's debts (correct)

Insurance against market fluctuations

Investment in real estate

Which of the following statements about the costs associated with factoring is true?

All forms of financing incur similar costs.

Factoring is cheaper than all forms of financing.

Factoring has no associated fees.

Factoring is generally more costly than most other funding sources. (correct)

What is a key characteristic that distinguishes non-recourse factoring from recourse factoring?

The client receives a higher discount rate.

The client must repay any outstanding debts.

The client retains complete control over debt collection.

The factor assumes the risk of bad debts. (correct)

How did factoring arrive on the Indian financial scene?

As a result of RBI initiatives Signup and view all the answers

Which organization is NOT mentioned as providing factoring services?

HDFC Bank Signup and view all the answers

What is a key characteristic of borrowed funds?

They are typically provided on the security of fixed assets. Signup and view all the answers

What advantage does factoring offer regarding the protection against bad debts?

Factoring provides protection against bad debt losses. Signup and view all the answers

Which of the following is considered an internal source of funds?

Ploughing back profits Signup and view all the answers

What type of finance companies also provide factoring services?

Non-banking finance companies Signup and view all the answers

When might a business require long-term funds?

To invest in technology upgrades Signup and view all the answers

In which scenario would recourse factoring be applicable?

The client retains the risk for bad debts. Signup and view all the answers

What determines the best source of funds for an organization?

The associated risk and purpose of funding Signup and view all the answers

External sources of funds primarily come from which of the following?

External lenders, investors, and suppliers Signup and view all the answers

What is one limitation of internal sources of funds?

They can fulfill only limited needs of the business. Signup and view all the answers

Which financing option would likely be preferred for addressing short-term operational expenses?

Quick loans from external lenders Signup and view all the answers

Which statement about retained earnings is correct?

They are generated within the organization and can reinvested back into it. Signup and view all the answers

What is a common benefit of obtaining loans from financial institutions compared to commercial banks?

They have more flexible repayment terms. Signup and view all the answers

What advantage do financial institutions offer beyond just providing funds?

They offer managerial and technical consultancy. Signup and view all the answers

How can obtaining a loan from financial institutions help a company in the capital market?

It increases the company's goodwill. Signup and view all the answers

What impact does the floating interest rate on ICDs usually have on borrowing companies?

It introduces uncertainty in financial planning. Signup and view all the answers

What restriction might be imposed on a borrowing company by financial institutions?

Limits on the frequency of dividend payments. Signup and view all the answers

During which economic period can financial institutions still provide funding?

Even during periods of depression. Signup and view all the answers

How does the repayment structure of loans from financial institutions typically benefit businesses?

It allows for repayments in easy instalments. Signup and view all the answers

What role may financial institutions take concerning the management of the borrowing company?

They may place their nominees on the Board of Directors. Signup and view all the answers

What are Global Depository Receipts (GDR) primarily used for?

To raise funds in foreign currency for Indian companies Signup and view all the answers

Which of the following institutions is a significant source of foreign currency loans for business?

Commercial Banks Signup and view all the answers

What rights do holders of Global Depository Receipts (GDRs) possess?

Dividends and capital appreciation Signup and view all the answers

How can holders of GDRs interact with their investments?

They can convert them into the equivalent number of shares Signup and view all the answers

What role do International Agencies and Development Banks play in the economy?

Financing international trade and business Signup and view all the answers

Which currency are Global Depository Receipts (GDR) denominated in when issued?

US Dollars Signup and view all the answers

What is a key characteristic of Global Depository Receipts (GDR)?

They can be traded like any other negotiable instrument. Signup and view all the answers

Which institution emerged as a major source of foreign currency loans for Indian industry?

Standard Chartered Signup and view all the answers

How much money have five firms raised through GDR offerings this year?

$464 million Signup and view all the answers

Which company mentioned is planning to raise $20 million through a GDR issue?

Opto Circuits Signup and view all the answers

What is the total worth of GDR issues that nearly 20 companies are waiting to launch?

$1 billion Signup and view all the answers

What does GDR stand for in the context of this content?

Global Depository Receipts Signup and view all the answers

Which two banks recently raised funds from the GDR market?

UTI Bank and Centurion Bank Signup and view all the answers

What is a possible reason companies now prefer GDR issues over FCCB?

Rise in interest rates abroad Signup and view all the answers

What is the purpose of an IDR in the Indian securities market?

To provide a local version of global shares Signup and view all the answers

Which firm was the first to issue Indian Depository Receipts (IDRs)?

Standard Chartered PLC Signup and view all the answers

Study Notes

Factoring

Factoring is a financial service where a "factor" provides services such as discounting bills, collecting debts, and offering protection against bad debt losses.
The factor purchases receivables from a client at a discount and takes over the responsibility of collecting payments from the buyer.
Two methods of factoring exist: recourse and non-recourse. Under recourse factoring, the client bears the risk of bad debts, while under non-recourse factoring, the factor assumes responsibility for payment.
Factoring is generally costlier than other sources of finance like bank credit.
Factoring emerged in India in the early 1990s due to Reserve Bank of India (RBI) initiatives.
Organisations providing factoring services include SBI Factors & Commercial Services Ltd., Canbank Factors Ltd., Foremost Factors Ltd., State Bank of India, Canara Bank, Punjab National Bank, and Allahabad Bank.
Non-banking finance companies and other agencies also offer factoring services.

Merits of Factoring

Factoring offers a cheaper source of finance compared to alternatives like bank credit.

Sources of Funds

Business can raise funds from both internal and external sources.

Internal Sources of Funds

Internal sources are generated within the business, like accelerating receivables collection, disposing of surplus inventory, and reinvesting profits.

External Sources of Funds

External sources include suppliers, lenders, and investors.

International Financing

The globalized business environment provides opportunities for Indian companies to raise funds internationally.

International Sources of Funds

Commercial Banks: Offer foreign currency loans for business operations.
International Agencies & Development Banks: Provide finance for international trade and business.
Global Depository Receipts (GDRs): Securities issued abroad by Indian companies to raise funds in foreign currency. Traded on foreign stock exchanges and can be converted to underlying shares. Holders typically do not have voting rights but receive dividends and capital appreciation.
Indian Depository Receipts (IDRs): Issued by foreign companies to raise funds from the Indian securities market. Shares are deposited with an Indian depository (custodian of securities) registered with the Securities and Exchange Board of India (SEBI). Residents can bid for these shares in the same way as Indian shares.
Foreign Currency Convertible Bonds (FCCBs): Issued by Indian companies to raise funds in foreign currency. These bonds can be converted into shares of the issuing company at a predetermined price.

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Description

This quiz covers the concept of factoring in financial services, including its definition, methods (recourse and non-recourse), and significance in India. Test your knowledge on the role of factors and organizations that offer these services. Learn about the evolution of factoring in the Indian financial landscape.