Factoring and forfaiting are forms of invoice financing that provide liquidity to companies. Factoring involves the sale of accounts receivable to a factor at a discount, who then takes on the responsibility of collection and provides financing against the receivables. Forfaiting specifically refers to financing of international trade receivables without recourse to the exporter. Key differences are that forfaiting provides 100% financing without recourse and guarantees against political and exchange rate risks, for longer tenors of 3-5 years, while factoring also includes receivables administration and is for shorter terms. Factoring is more widely used in India while forfaiting remains less developed due to issues like high costs and lack

1. Working Capital
Management
FIN353
Factoring and Forfaiting

2. Factoring: The Concept…
• “Factor is a financial intermediary which assumes the
responsibility of collection of receivables arising out of
credit sales of their clients and in return charges
commission for its services”.
• So, a Factor is…
ü A Financial Intermediary/Institute/Company
ü That buys invoices of a manufacturer or a trader, at a
discount, and
ü Takes responsibility for collection of payments.

3. Factoring: The Concept…
• “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 upto 80%)
immediately after the debts are purchased
thereby providing immediate liquidity to the
Client”.

4. 5/24/18 4
Factoring Services - Concept
Client Customer
Factor
Order placed
Deliver of goods
Client submits invoice
Factor-Prepayment
Monthly statements
Customer pays

5. Process of Factoring:
• Client makes a credit sale with a customer.
• Client sells the customer’s account to the Factor and notifies
the customer.
• Factor makes partly 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.

6. Charges for Factoring Services:
• Factor charges Commission (as a flat percentage of value of
Debts purchased) (0.50% to 1.50%)
•
• Commission is charged up-front.
•
• For making immediate partly 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.

7. Functions of a Factor:
1. Administration of sales ledger
- Maintains the client’s sales ledger
- Gives periodic reports
- Current status of his receivables
- Receipts of payments from customers
- Customer-wise record of payments
- Change in payment pattern
2. Provision of collection facility
- Undertakes to collect receivables on behalf of the client
- Relieving the clients from problems involved in collection
- Enables the clients to reduce cost of collection

8. Functions of a Factor: CONT…
3. Financing Trade Debts:
4. Credit Control And Credit Protection:
- This service is provided where debts are factored
without recourse. Factor assumes the risk of default.
5. Advisory Services:
- Specialized knowledge and experience
- Customers’ perception
- Change in marketing strategies
- Emerging trends

9. Types / Forms of Factoring:
1. Recourse Factoring:
ü Factor does not assume credit risks associated with
receivables.
ü Credit Risk is borne by the Client.
ü In India, Factoring is done with recourse.
2. Non-Recourse Factoring:
ü Factor assumes credit risks associated with receivables.
Charges a higher commission
ü Credit risk is assumed by Factor
ü In USA/UK, Factoring is commonly done without recourse.

10. Types / Forms of Factoring:
3. Advance Factoring:
ü Factor pays a specified portion (75% to 90%) in advance.
ü Balance being paid upon collection from the customer. The
client has to pay interest on advance payment.

11. Example of Advance Factoring Mechanism:

12. Types / Forms of Factoring: CONT…
4. Maturity Factoring / Collection Factoring:
ü Factor does not make any advance payment to the Client.
ü Factor Pays on date of collection/agreed future date.
ü Less RISK for Factor and charges nominal commission.
5. Full Factoring / Old Line Factoring:
ü Features of almost all the factoring services.
ü Entire spectrum of services; collection, credit protection, sales
ledger administration, short-term finance.

13. Types / Forms of Factoring: CONT…
6. Disclosed Factoring:
ü Name of factor is disclosed in sales invoice.
7. Undisclosed Factoring:
ü Name of factor is NOT disclosed in sales invoice.
8. Domestic Factoring:
ü Buyer, Seller, Factor domiciled in the same
country.

14. Types / Forms of Factoring: CONT…
9. Export / Cross Border / International Factoring:
ü Usually Four Parties Involved Viz. the Exporter, Importer,
Export Factor, Import Factor.
ü Two Agreements.
ü Import Factor Provides Link Between Export Factor and
Importer.
ü Import factor underwrites customer trade credit risk, collects
receivables and transfers fund to export factor.

15. International Factoring Transactions:

16. Advantages of Factoring:
1. Off-balance Sheet Finance
2. Reduction of Current Liabilities
3. Improvement in Current Ratio
4. Higher Credit Standing:
5. More time for Planning and Production
6. Reduction of Cost and Expenses
7. Additional Source of Finance

17. WHY FACTORING HAS NOT BECOME POPULAR IN INDIA?
• Banks’ unwillingness to provide factoring services
• Problems in recovery.
• Factoring requires assignment of debt which attracts Stamp
Duty.
• Cost of transaction becomes high.
• Lack of awareness.
•

18. Factoring in INDIA: Major Players
• SBI Factors and Commercial Services Pvt. Ltd.
• Canbank Factors Limited
• Global Trade Finance Limited
• Foremost Factors Limited
• HSBC Bank
• CITI Bank NA, India
• Standard Chartered Bank
• SIDBI
• ECGC Ltd.
•

19. FORFAITING: THE CONCEPT
- “Forfeiting refers to financing of receivables pertaining to
international trade”.
- Forfaiting is a mechanism by which the right for export
receivables of an exporter (Client) is purchased by a
Financial Intermediary (Forfaiter) without recourse to him.
- Converts exporter’s credit sale into cash sale.
- Discounting the documents covering the entire risk of non-
payment in collection.
- Credit period can range from 3 to 5 years.

21. Characteristics of Forfaiting:
• Converts Deferred Payment Exports into cash transactions,
providing liquidity and cash flow to Exporter.
• Discharge Exporter from Cross-border Political OR Exchange
Risk associated with Export Receivables.
• Finance available upto 100% (as against 75 - 80% under
conventional credit) without recourse.
• Acts as additional source of funding and hence does not have
impact on Exporter’s borrowing limits. It does not reflect
as debt in Exporter’s Balance Sheet.
• Provides Fixed Rate Finance and hence risk of interest rate
fluctuation does not arise.

22. Characteristics of Forfaiting: Cont…
• Exporter is freed from credit administration.
• Simple Documentation as finance is available against bills.
• Forfait financer is responsible for each of the Exporter’s trade
transactions. Hence, Export business can be done more
efficiently.
• Forfait transactions are confidential.
•

23. FORFAITER’S CHARGES
• The DISCOUNT charged by the Forfaiter depends upon:
•
üCost of Forfaiting
üMargin to cover risk
üManagement charges
üFees for delayed payment
üPeriod of Forfaiting contract
üCredit rating of Avalling Bank
üCountry/Currency Risk of the importer

24. Export Factoring V/s Forfeiting:
●Sr.
No.
●Export Factoring ●Forfaiting
●1 ● 75 to 90% Financing ● 100% Financing
●2 ● Financing, Collection, Sales
● Ledger Administration
● Pure Financing
●3 ● Short Term Financing ● 3 To 5 Years
●4 ● Does not guard against
● Exchange Rate Fluctuation
● Forfaiter guards.

25. FACTORING vs. FORFAITING
POINTS OF
DIFFERENCE
FACTORING FORFAITING
Extent of
Finance
Usually 75 – 80% of the
value of the invoice
100% of Invoice
value
Credit
Worthiness
Factor does the credit
rating in case of non-
recourse factoring
transaction
The Forfaiting Bank
relies on the
creditability of the
Availing Bank
Services
provided
Day-to-day
administration of sales
and other
allied/advisory services
No services are
provided

26. FACTORING vs. FORFAITING – CONT…
POINTS OF
DIFFERENCE
FACTORING FORFAITING
Recourse With or without recourse Always without recourse
Size of transaction●Usually no restriction
on minimum size of
transactions that can
be covered by
factoring.
●Transactions should
be of a minimum
value of USD 250,000.
Scope of service ●Service is available for
domestic and export
receivables.
●Usually available for
export receivables
only denominated in
any freely convertible
foreign currency.

27. WHY FORFAITING HAS NOT DEVELOPED…
• Relatively new concept in India.
• High Rupee Fluctuation
• High cost of funds
• High minimum cost of transactions (USD 250,000/-)
• RBI Guidelines are unclear.
• Very few institutions offer such services in India. Exim Bank
is one of the major player and very few other co’s
involved.
• Lack of awareness.

28. 5/24/18 28
List of some Forfaiters:
• Standard Bank, London
• Hong Kong Bank
• ABN AMRO Bank
• Meghraj Financial Services
• Triumph International Finance India Ltd.,
• Natwest Bank
• Meridian Finance Group