Factoring v/s Forfaiting

Factoring is defined as a method of managing book debt, in which a business receives advances against the accounts receivables, from a bank or financial institution (called as a factor). There are three parties to factoring i.e. debtor (the buyer of goods), the client (seller of goods) and the factor (financier). Factoring can be recourse or non-recourse, disclosed or undisclosed.

Forfaiting is a mechanism, in which an exporter surrenders his rights to receive payment against the goods delivered or services rendered to the importer, in exchange for the instant cash payment from a forfaiter. In this way, an exporter can easily turn a credit sale into cash sale, without recourse to him or his forfaiter.

Factoring and Forfaiting:

• Factoring provides only 80% of the invoice. But 100% finance is provided in forfaiting.
• Factoring is both domestic and foreign trade finance. Whereas forfaiting is only financing of foreign trade.
• In factoring, invoice is purchased belonging to the client. Whereas the export bill is purchased in forfaiting.
• Factoring may have recourse to seller in case of default by buyer. But there is no recourse to exporter in forfaiting.
• There is no letter of credit involved in factoring. But there is letter of credit involved in forfaiting.
• Factoring does not provide scope for discounting in the market as only 80% is financed. But forfaiting provides scope for discounting the bill in the market due to 100% finance.
• Factoring may be financing a series of sales involving bulk trading. Only a single shipment is financed under forfaiting.