This document discusses factoring and forfaiting. It defines factoring as a transaction where a financial intermediary called a factor assumes responsibility for collecting receivables from a client's credit sales in exchange for a commission. Forfaiting is defined as the purchase of a client's export receivables by a financial intermediary called a forfaiter without recourse to the client. The document outlines the key differences between factoring and forfaiting such as the extent of finance provided, credit risk assessment, services offered, recourse, minimum transaction size, and scope of services.

1. Financial Services

2. Factoring and
Forfaiting

3. Factoring and Forfaiting
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
Purpose of this transaction is to facilitate the immediate
Purpose of this transaction is to facilitate the immediate
payment of an invoice(s) in order to allow a business to
accelerate cash flow and growth
Other Functions: Administration of Sales ledger; Provision of
Collection Facility, Advisory Services etc.
Ex.: India factoring and finance solutions, SBI Factors and
Commercial Services Pvt. Ltd., Canbank factors etc.

4. Factoring Arrangement

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

6. Types of Factoring
Recourse vs. Non-recourse Factoring:
Under a recourse factoring the Factor purchases
receivables on the condition that loss arising on
account of non-recovery will be borne by the
Client.
Client.
Credit Risk lies with the client in case of recourse
factoring
Advance vs. Maturity Factoring
In maturity factoring the factor agrees to pay an
amount to the client on an agreed date

7. Types of Factoring
Disclosed vs. Undisclosed Factoring
In the disclosed factoring the name of the factor is
disclosed in the invoice by the supplier-
manufacturer of the goods asking the buyer to
make the payment to the factor
make the payment to the factor
Domestic vs. Export Factoring
If the parties involved viz. customer, client, and
factor are domiciled in the same country – it is
known as domestic factoring

8. Illustrations
Ex.: Following information is available related to
Company X:
Annual sales of Rs. 3.2 crores with average
collection period of 90 days.
Bad debt losses – 1.5% on sales.
Bad debt losses – 1.5% on sales.
Administrative expenditures towards collection
efforts are Rs. 5,00,000.
If a Factor is prepared to buy the firm’s receivables
by charging 2% commission and will pay advance
on receivables to the firm at an interest rate of 18%
after withholding 10% as reserve calculate the
effective cost of factoring to the firm.

9. Factoring vs. Forfaiting
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.
(Forfaiter) without recourse to him.
It is different from International Factoring in as
much as it deals with receivables relating to
deferred payment exports, while Factoring deals
with short term receivables.

10. Exporter Importer
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2
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Forfaiting
Transactions
Avalling Bank
Forfaiter
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10
1. Committed to purchase debt
2. Commercial contact
3. Delivery of goods
4. Gives guarantee
5. Hands over documents
6. Delivers documents
7. Makes payment
8. Presents document for payment
9. Repays at maturity
10.Payment to the forfaiter

11. 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 Factor does the credit The Forfaiting Bank
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

12. FACTORING vs. FORFAITING
POINTS OF
DIFFERENCE
FACTORING FORFAITING
Recourse With or without recourse Always without
recourse
Size of
transaction
Usually no restriction on
minimum size of
Transactions should
be of a minimum
transaction minimum size of
transactions that can be
covered by factoring.
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.

13. Thanks