Bill discounting allows banks to purchase bills or notes from customers before their maturity and credit the discounted value to the customer's account. It provides working capital financing to the customer. Factoring involves the ongoing assignment of accounts receivable invoices from a client to a factoring company, which provides working capital financing, invoice collection services, and accounts receivable management. Forfaiting involves the discounted purchase of medium-term bills of exchange associated with international trade transactions by a forfaiter, typically with tenors of 6 months to 10 years.

1. Bill Discounting
Factoring &
Forfaiting

2. BILL DISCOUNTING
 While discounting a bill, the Bank buys the
bill (i.e. Bill of Exchange or Promissory Note)
before it is due and credits the value of the
bill after a discount charge to the customer's
account. The transaction is practically an
advance against the security of the bill and
the discount represents the interest on the
advance from the date of purchase of the bill
until it is due for payment.

3. CONDITIONS
A bill must be a usance bill.
 It must have been accepted and bears at
least two good signatures (e.g. of reputable
individuals, companies or banks etc.)
 The Bank will normally only discount trade
bills.
 Where a usance bill is drawn at a fixed
period after sight the bill must be accepted to
establish the maturity.

4. CONDITIONS
 The discount should be based on real trade
background.
 The discount tenor starts from the date of
discount and expires at the maturity of the
bill.

5. DIFFERENT TYPES OF BILLS
DISCOUNTING
 Sales bill discounting (Drawer bill
discounting)
 Supplier bill discounting (Drawee bill
discounting)
 LC Bill discounting

6. What is factoring?
 Factoring is an ongoing arrangement between the
client and the factor, where the sales of goods and
services are made on open account terms and the
invoices for the same are assigned to the factor
regularly for the purpose of funding, collection and
sales ledger administration.
 Factoring involves a long-term relationship between
the buyer and the seller with the whole turnover
being assigned to the factoring company.

7. Origin
 Came into existance in the year 1920
 It was not an organised sector that time
 Association of British Factors(ABF) came in 1976
 Nearly 90% of global factoring turnover comes from
USA & Europian countries
 RBI appointed the C.S.Kalyanasundaram Committee
(1988)
 It suggested to start factoring by a bank through its
subsidiary

8. As of today,
 Worldwide, factoring volume is more than
USD 700 billion a year
 Spread over nearly 60 countries and
covering more than 1,00,000 businesses.
 Particularly in developed countries, factoring
is an accepted way of conducting business.

9. Why use Factoring?
 Through the use of Factoring receivables are
instantly converted into cash leading to improved
cash flows that can help funding of future growth.
 It facilitate an efficient follow up of payments from
buyers, which is made possible through
relationships developed by factors with client’s
buyers.
 Factoring provides credit protection for export
sales which enables to do business with buyers
who are unwilling to open Letters of Credit.
 Factoring also provides other peripheral services
such as advisory services, credit assessment, etc.

10. What are the types of factoring
arrangement?
 There are basically two types of Factoring
arrangements:
1) Domestic Factoring- If you are selling in
India.
2) International Export Factoring- If you are
exporting form India.

11. Domestic Factoring
 The factoring arrangement where all the
three- the factor, the seller and the buyer are
in the same country, subject to the same
laws.

12. International Factoring
 The factoring arrangement, where the seller
and the buyer are in two different countries
involving co-operation between two factoring
companies, one in the seller’s country
(Export Factor) and the other in the buyer’s
country (Import Factor)

13. Major Types of Factoring
Non-Recourse Factoring - It is the most
comprehensive type of factoring arrangement
offering all types of services namely:
 Finance
 Sales Ledger Administration
 Collection
 Debt Protection
 Advisory Services
 It gives protection against bad debts to the client.
In other words, in case the customer fails to pay,
the factor will have ‘no recourse’ to the client and
will have to absorb the bad debts himself.

14. Recourse Factoring
 In this type of factoring arrangement, the
factor provides all types of facilities except
debt protection. In other words, the client is
responsible for any bad debts incurred.

15. Invoice Discounting
 In this type of factoring arrangement, only
finance is provided and no other service is
offered.

16. Undisclosed Factoring Or Open
Account Receivables
 The factor does not follow up or collect
payment from the customer. The customer
may not be aware of the factoring
arrangement and pays the client directly. The
factor receives payment of invoices through
the client.

17. Factoring Charges
 Finance Charge - It represents the interest
on funds made available to the client by way
of prepayment against purchase of approved
invoices.
 Service Charge - The charge levied for
rendering non-funding services such as
collection, sales ledger maintenance and
other advisory services.

18. How much advance can Client get?
 Advances are made as a percentage of
invoice value based on criteria, such as,
quality of receivables, number and quality of
the buyers and client’s requirements.
Typically 80 % of invoice value is advanced.

19. Advantages (to the client)
 Immediate conversion of cash sale
 Competitive credit terms
 Accelerate the production cycle
 Free from tensions
 Efficient W.Cap. Management
 Assessing quality of debtors
 Expansion of business

20. Advantages
 To the Buyers
– Adequate credit facilities
– Getting periodical statement from the factor
– No affect on quality of goods, contractual
obligations etc.

21. Benefits of International Factoring
 To the Exporter
– Deals with only one factor
– He gets specialised knoweledge
– Risk of B/D are reduced
 To the Importer
– Pays the invoice in the same country
– Gets better credit terms

22. Factoring is not suitable under following
cases -
a) where large volume of cash sales take place.
b) engaged in speculative business.
c) selling highly specialized capital equipments or
made-to-order goods.
d) where credit period offered to the buyers is
more than 180 days.
e) where there is Consignment Sale or 'Sale or
Return Arrangements'.
f) where sales are to the sister / associated
companies .
g) where sales are to the public at large, etc.

23. FCI (Factors Chain International)
 FCI is a global network of leading factoring countries
 It helps its members achieving competitive advantage
through:
– A global network
– Modern & effective communication system
– Reliable legal framework
– Standard procedures
– Universal quality
– World wide promotion
– Training programmes

24. Factoring Profile(India)
 Number of factoring companies – 08
 From Domestic factoring turnover – 1450
(million euros)
 From International factoring turnover - 175
(million euros)
 From Total factoring turnover - 1625 (million
euros)

25. Large number of industries
 Covered under factoring, including
automobiles, pharmaceuticals, textile,
garment and engineering.
 In addition to the manufacturing sector, the
services sector industries, such as, traveling,
telecommunications, software services and
so on are also suitable for factoring.

26. FCI Members
 Can Bank Factors Ltd. - Bangalore www.canbankfactors.com
 City Bank – Mumbai
 ECGC of India Ltd.- Mumbai
 Foremost Factors Ltd.- New Delhi www.foremostfactors.net
 Global Trade Finance Ltd.- Mumbai www.gtfindia.com
 SBI Factors & Commercial Services Pvt.Ltd – Mumbai
www.sbifactors.com
 The HSBC Ltd. - Mumbai www.hsbc.co.in

27. Bill Discounting Vs Factoring
 Individually Acceptance  One time acceptance
 Short term duration  Long term
 High cost  Low cost
 More paper work  Less paper work
 3 days grace period  Higher grace period
 Requirement of original  Copies -o.k.
documents  Off B/s is possible
 Off B/s can not be  Both domestic &
Domestic International
 No assignment of debt  Assignment of debt

28. Forfaiting
Forfaiting, or Medium-Term Capital Goods
Financing, means selling a bill of exchange, at a
discount, to a third party, the Forfaiter, who collects
the payment from an, essentially, overseas
customer, through a collateral bank(s), and, thus,
assuming the underlying responsibility of exporters
and simultaneously providing trade finance for
importers by converting a short-term loan to a
medium term one.

29. Forfaiting…
 Done on a non - recourse basis
 Used for international trade transactions, usually for
transactions not less than $100,000
 Tenor of instrument ranges from 180 days to 10 years
 payments are made quarterly, semi-annually, annually, or
on a bullet basis
Not so Popular as People
 are suspicious of its simplicity
 coupled with a lack of complex documentation

30. Information the Forfaiter needs
 who the buyer is and his nationality;
 what goods are being sold;
 details regarding the value and currency of the contract;
 the date and duration of the contract,including the credit
period and number and timing of payments (including any
interest rate already agreed with the buyer)
 evidence of debt that will be used (either promissory notes,
bills of exchange, letters of credit)
 the identity of the guarantor of payment (or avalor).

31. Documents required
by Forfaiter from exporter
 Copy of supply contract, or of its payment terms
 Copy of signed commercial invoice
 Copy of shipping documents including certificates of
receipt, railway bill, airway will, bill of lading or
equivalent documents
 Letter of assignment and notification to the guarantor
 Letter of guarantee, or aval (standby letters of credit
may also be used)

32. Forfaiting Charges
 Forfaiters try to ensure that the buyer, not the seller,
incurs charges involved in a Forfait transaction.
Charges depend on
 the level of interest rates relevant to the currency of
the underlying contract at the time of the Forfaiter's
commitment
 the Forfaiter's assessment of the credit risks related
to the importing country and to the avalizing (or
guaranteeing) bank

33. Forfaiting vs Export Factoring
Similarities
 Doneon Non – recourse basis
 Common features for advance payment

34. Differences
Forfaiting Export Factoring
The entire value of bill is Discounted value ranges
discounted by forfaiter between 75 – 85 %
Involvement of Availing Bank Export factor assesses credit
worthiness
Purely a financing arrangement Also includes ledger
administration, collection, etc
Long term Short term
Exchange rate fluctuations are Exchange rate fluctuations not
guarded against guarded against