A syndicated credit is an agreement between two or more lending institutions to provide a borrower a credit facility using common loan documentation. Syndicated loans are arranged by a syndicator who brings together the lenders. It is a convenient mode of raising long term funds. They normally carry a common interstate being charged by all the lenders, though option to charge floating rate of interest is retained. The Process The process of Syndicated Credit facility goes as under: The borrower mandates a banker as lead manager (or arranger) of his choice to arrange loan for him. The mandate spells out the terms of the loan and the mandated bank’s rights and responsibilities. The arranger prepares an information memorandum and circulates it among prospective lender banks soliciting their participation in the loan. On the basis of the memorandum and on their own independent economic and financial evaluation the lending banks take a view on the proposal.
The arranger convenes a meeting to discuss the syndication strategy relating to coordination, as well as control and finalizes deal timing, management fees, cost of credit etc. The loan agreement is signed by all participating banks. At this point of time, the role for arranger ends, and the role of the agent commences. The agent performs his duty as expressed in the syndication agreement which is basically on the lines of a trustee between the lending banks and the borrower. Advantages of syndicated loans Abroad, it is seen that the terms, consortium finance and syndicated credit facility, are used interchangeably, though in India, we refer to these facilities to two specific ways of lending. Traditionally, consortium advances are given by the coming together of several banks to lend larger advances. These banks undertake common appraisal and common documentation.
Normally, the lender who takes the maximum share in the consortium finance acts as the Lead Manager. Syndicated loans, on the other hand are arranged by a syndicator who is the interface for the borrower till documentation, where after the agent takes over. In syndication, the lenders are responsible only up to their share of lending i.e., basis of lending is several. Syndicated loans also provide the lenders scope for innovations and flexibilities in loan structuring to suit borrower’s needs. The further provide scope for fee based income tobanks in their roles as arrangers/agents.In the syndicated loans, borrowers need not runaround negotiating with all the lending banks. Thearranger, from the arranging to thedocumentation stage and the agent thereafter,will take care of that duty at a fee. Hence it ishassle-free and less expensive for theborrowers.Credit Policy for the first half of 1997-98 gave apush to launching the syndicated finance inIndia. Credit syndication while popular in largeforeign currency term loans has not made muchheadway in other areas. This is attributable moreto the user-friendliness of consortium finance. Factoring involves purchase of receivables of the company for payment of cash.l
In effect, the Company, which sells its goods on credit, gets cash payment immediatelyfrom a third party called factor.l Factoring includes other functions such as account .maintenance, collection of debtand risk assumption.The term factor has its origin in the Latin wordFacere meaning to make or do, i.e., to getthings done. The International Institute for the Factoring means an arrangement between aFactor and his Client which includes at least twoof the following services to be provided by theFactor: (1) Finance, (2) Maintenance ofAccounts, (3) Collection of Debts and (4)Protection against Credit Risks.Factoring has also been defined as a continuousrelationship between a financial institution (thefactor) and a business concern selling goodsand/or providing service (the client) to a tradecustomer (customer) on an open account basis,whereby the factor purchases the clients bookdebts (accounts receivables) with or withoutrecourse to the client thereby controlling thecredit extended to the customer and alsoundertaking to administer the sales ledgersrelevant to the transaction.Factoring refers to management of receivablesof a company by a financial intermediary (factor)for a fee.
The need for factoring arose on account of the inordinate delays faced by suppliers for realising their bills from their customers. Factoring could be with or without recourse to the supplier, on whose behalf this service is undertaken. While with recourse factoring is like our usual bill discounting facility where the money is recovered on the return of the bill, in without recourse factoring the factor takes the risk of non-payment of bills. Factoring businesses characterized by low margin and high risk. A factoring transaction takes place along the following lines: Upon a sale taking place, the seller (client)forwards invoices on buyer (customer) to factor. The Factor sends copy of invoice and notice of assignment to buyer (customer) and makes a prepayment of say, 75 to 80 percent of invoice value to the seller and the balance is retained as margin. On the due date, the buyer (customer) makes payment to the factor who settles the account and releases the margin retained by him after recovery of all other charges/out of pocket expenses .A factor is thus another financial intermediary between the seller and the buyer; but unlike abank, the unique selling proposition of a factories in its strength in handling and collecting receivables in a more efficient, effective and purposive manner.
