Arvind Sonmale, managing director and chief executive officer of GTF speaks to Falaknaaz Syed on on the benefits of factoring for exporters and importers.

What is factoring?

Factoring is discounting of sales offered on credit terms without recourse to the seller. A factor provides such factoring service, which includes financing, sales ledger, collection and credit protection.

How is factoring advantageous to an exporter compared to traditional bank products or credit insurance?

Traditional bank products are linked to the inventory and book debt projections submitted by the company to the bank at the  beginning of the financial year and accordingly, limits are approved by the bank for that year.

They are driven by collateral, high margins and a letter of credit or bill of exchange from the buyer.

However, in the case of factoring, limits are linked to actual sales and growth therein. So practically speaking, the limit may be enhanced several times a year, giving greater a flexibility and liquidity in managing the working capital cycle of the exporter.

Credit insurance is simply credit protection of the exporter's receivables. It offers no finance solution. Factoring on the other hand combines both the bank's and the credit insurer's role by proving both finance and credit protection. In addition, a factor does not require collateral.

Why does a factor finance only 80 to 90 per cent of the invoice value of the goods and not 100 per cent?

Invoices are financed at the instance of completion of shipment and before the formal acceptance of documents and goods by the importer. The margin is kept to accommodate any deductions and/or rejections that an Importer may make on a consignment during the normal course of business.

Also, interest on the prepaid amount is not deducted upfront but is based on monthly rests.

What is import factoring and how has it picked up in India and to what extent?

As the economy expands and imports continue to grow, industry needs solutions that are more flexible and allow a company to import raw material at attractive credit terms.

Import factoring is an important tool for such finance options. Import factoring is a financial service that enables you to purchase goods from your overseas supplier on short term credit of upto 180 days on open account terms without the need for opening a letter of credit.

As an importer, you will receive credit from your overseas suppliers without incurring any additional cost charged to a factor like GTF. Your primary obligation would be to make payments to the factor on the due date.

Why don't factors finance subsidiaries? A lot of pharma companies, for instance, have foreign subsidiaries?

GTF now offers this solution on a selective basis.