This document provides an overview of factoring and forfaiting processes used in international trade finance. It discusses that factoring involves the sale of book debts or invoices by an exporter to a factor, who provides financing and collects payment. Forfaiting involves the purchase of export receivables by a financial intermediary without recourse to the exporter. The key differences are that factoring may involve credit risk transfer, while forfaiting is done on a non-recourse basis. Both tools help companies raise working capital by discounting outstanding receivables. The document outlines the various parties, documents, costs and applicable regulations for these financial services.

1. Factoring & Forfaiting: Process,
Characteristics and Modus
Operandi
Export-Import Procedure & Documentation
Assignment
Submitted By:
Anshul Aggarwal
MBA(IB)

2. Introduction
In India, post economic liberalization of 90s the export & import activities
surged in the economy, which required new sources & tools of finance for
international trade and to keep the pace with the requirements of
International Trading community, financial services sector moved faster.
Financial institution tried to extend their axis trace to trading community
through Book Debt Financing and two of the widely used tools for book debt
financing in international business are:-
 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.
 Forfaiting: Forefaiting 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.

3. Factoring & Forfaiting History
in India
 Kalyana Sundaram Committee recommended
introduction of factoring in 1989.
 Banking Regulation Act, 1949, was amended in 1991
for Banks setting up factoring services.
 SBI/Canara Bank have set up their Factoring
Subsidiaries:-
◦ SBI Factors Ltd., (April, 1991)
◦ CanBank Factors Ltd., (August, 1991).
 RBI has permitted Banks to undertake factoring
services through subsidiaries.

4. What is Factoring?
Factoring is a service that is concerned with the financing and
collection of account
receivables in domestic and international trade. It is an ongoing
arrangement between the client and factor (usually a bank or a
financial institution), where invoices raised on open account
sales of goods and services are regularly assigned to 'the factor'
for financing, collection and sales ledger administration
The client sells invoiced receivables at a discount to the factor
to raise finance for working capital requirement. The factor may
or may not accept the incumbent credit risk. Factoring enables
companies to sell their outstanding book debts for cash.

5. Factoring: Process

6. Types of Factoring
There are two types of factoring services
1. Recourse Factoring: In recourse factoring, in the
case of non-payment of invoices by customers,
the factor will recover the amount advanced from
the client.
2. Non-recourse Factoring: In non-recourse
factoring, the factor provides both finance and
credit protection. In case of non-payment of
invoices by customers, the factor will bear the risk
of bad debts.

7. International Factoring
 It is similar to domestic factoring except that there are four parties, viz.,
a) Exporter,
b) Export Factor,
c) Import Factor, and
d) Importer.
 Exporter (Client) enters into factoring arrangement with Export Factor in
his country and assigns to him export receivables.
 Export Factor enters into arrangement with Import Factor and has
arrangement for credit evaluation & collection of payment for an agreed
fee.
 Notation is made on the invoice that importer has to make payment to the
Import Factor.
 Import Factor collects payment and remits to Export Factor who passes
on the proceeds to the Exporter after adjusting his advance, if any.
 Where foreign currency is involved, Factor covers exchange risk also.

8. Charges for Factoring
Services
 Factor charges Commission (as a flat
percentage of value of Debts
purchased) (0.50% to 1.50%)
 Commission is collected up-front i.e.
at discount
 For making immediate part payment,
interest charged. Interest is higher
than rate of interest charged on
Working Capital Finance by Banks.

9. Statutes Applicable To
Factoring
 Indian Contract Act
 Sale of Goods Act
 Transfer of Property Act
 Banking Regulation Act.
 Foreign Exchange Regulation Act.

10. Forfaiting
“Forfait” is derived from French word ‘A Forfait’ which means surrender of
fights. Forfeiting is a means of finance (credit) an exporter of goods avails
from an intermediary called the forfaiter against the export receivables but
without the obligation to repay the credit. Forfeiting is used for international
trade transactions.
In fact, it is the discounting of trade receivables such as drafts drawn
under letters of credit, bills of exchange, promissory notes, or other
freely negotiable instruments on a 'no recourse' basis, (i.e. without
recourse to
the exporter in case the importer fails to pay on the due date).

11. Mechanism of Forfaiting

12. Documents Required By The
Forfaiter
a) Copy of supply contract or of its payment terms.
b) Letter of credit or guarantee, which is the
forfaiters' preferred form of security of payment of
a bill or note. For a LC/Guarantee to be
acceptable, the issuing bank must be
c) internationally reputed and credit-worthy. The
most important point to remember is that any
LC/guarantee should be irrevocable,
unconditional, divisible and assignable.
d) Copy of signed commercial invoice.
e) Copy of shipping documents including certificates
of receipt, railway bill, airway bill, bill of lading or
equivalent documents
f) Letter of assignment and notification to the
guarantor.

13. Costs Involved In Forfaiting
 Commitment Fee:- Payable to Forfaiter by Exporter
in consideration of forefaiting services.
 Commission:- Ranges from 0.5% to 1.5% per
annum.
 Discount Fee:- Discount rate based on LIBOR for
the period concerned.
 Documentation Fee:- where elaborate legal
formalities are involved.
 Service Charges:- payable to Exim Bank.

14. FACTORING vs. FORFAITING

15. Thank you