Team -7

K.Shanmukha Srinivas – 1226108132Sudershan Sharma – 1226108251Lawi Anupam – 1226108221

KOREAN PLASTICS COMPANY

GITAM INSTITUTE OF INTERNATIONAL BUSINESSVISAKHAPATNAM

WHAT IS FACTORING ?

Factoring is the Sale of Book Debts by a firm (Client) to a financial institution (Factor) on the understanding that the Factor will pay for the Book Debts as and when they are collected or on a guaranteed payment date.

Normally, the factor makes a part payment (usually up to 80%) immediately after the debts are purchased thereby providing immediate liquidity to the Client.

The parties involved in the factoring transaction are:-

a) Supplier or Seller (Client)

b) Buyer or Debtor (Customer)

c) Financial Intermediary (Factor)

PROCESS INVOLVED IN FACTORING

Client concludes a credit sale with a customer.

Client sells the customer’s account to the Factor and notifies the customer.

Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance.

Factor maintains the customer’s account and follows up for payment.

Customer remits the amount due to the Factor.

Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.

PROCESS OF FACTORING

FACTOR

CLIENT CUSTOMER

CHARGES FOR FACTORING SERVICES

Factor charges Commission (as a flat percentage of value of Debts purchased) LIBOR + (0.50% to 1.50%)

Commission is collected up-front.

For making immediate part payment, interest charged. Interest is higher than rate of interest charged on Working Capital Finance by Banks.

If interest is charged up-front, it is called discount.

TYPES OF FACTORING

1. Recourse Factoring Up to 75% to 85% of the Invoice Receivable is factored.

Interest is charged from the date of advance to the date of collection.

2. Non-recourse Factoring Factor purchases Receivables on the condition that the Factor has no recourse to the Client, if the debt turns out to be non-

recoverable.

Credit risk is with the Factor.

Higher commission is charged.

3. Maturity Factoring Factor does not make any advance payment to the Client.

Pays on guaranteed payment date or on collection of Receivables.

Nominal Commission is charged.

4. Cross-border Factoring

Facts about KPC

KPC produces a unique product. Very less competitors ( 2 globally).

60% of the production used to be exported i.e major share used to come from foreign

markets.

Products where used for windows , doors ,room dividers, furniture & signage.

Used to produce high quality products because they wouldn't fade.

KPC plastics have been used in the world tallest building ,major international airports , hotels

& offices.

Each order size used to run in millions of dollars with delivery & payment schedule spread

out over several years.

Foreign receivables where facing a serious lag than domestic receivables.

There was a liquidity problem in the company.

Even though the sales have increased compared to last year net income declined & actually

turned into negative in 2001.

Several causes of the deterioration.

I. Collection on the receivables were deteriorating i.e. increase in average time of

receivables outstanding to 116 days & interest cost where rising high on the borrowed

money.

II. Inventory was growing quickly which resulted in cash flow squeeze.

III. Availability of substitutes for the KPC products at cheaper cost.

Due to slow down of credit payments suppliers slowed their shipments. Resulted in delay of

orders to KPC.

Contd…

KOREAN PLASTICS COMPANY

Income Statement