Forfeiting and factoring are services in international market given to an
exporter or seller. Its main
objective is to provide smooth cash flow to the sellers. The basic
difference between the forfeiting and factoring is that forfeiting is a long
term receivables (over 90 days up to 5 years) while factoring is a shorttermed
receivables (within 90 days) and is more related to receivables against
The terms forfeiting is originated from a old French word ‘forfait’, which means to
surrender ones right on something to someone else. In international trade,
forfeiting may be defined as the purchasing of an exporter’s receivables at a
discount price by paying cash. By buying these receivables, the forfeiter frees
the exporter from credit and the risk of not receiving the payment from the
The exporter and importer negotiate according to the proposed export
sales contract. Then the exporter approaches the forfeiter to ascertain the terms
of forfeiting. After collecting the details about the importer, and other
necessary documents, forfeiter estimates risk involved in
it and then quotes the discount rate.
The exporter then quotes a contract price to the overseas buyer by loading the
discount rate and commitment fee on the sales price of the goods to be exported
and sign a contract with the forfeiter. Export takes place against documents
guaranteed by the importer’s bank and discounts the bill with the forfeiter and
presents the same to the importer for payment on due date.
In case of Indian exporters availing forfeiting facility, the
forfeiting transaction is to be reflected in the following documents
associated with an export transaction in the manner suggested below:
- Invoice : Forfeiting discount, commitment fees,
etc. needs not be shown separately instead, these could be
built into the FOB price, stated on the invoice.
- Shipping Bill and GR form : Details of the
forfeiting costs are to be included along with the other details, such FOB
price, commission insurance, normally included in the "Analysis of Export
Value "on the shipping bill. The claim for duty drawback, if any is to be
certified only with reference to the FOB value of the exports stated on the
The forfeiting typically involves the following cost elements:
1. Commitment fee, payable by the exporter to the forfeiter ‘for latter’s’
commitment to execute a specific forfeiting transaction at a firm discount rate
with in a specified time.
2. Discount fee, interest payable by the exporter for the entire period of
credit involved and deducted by the forfaiter from the amount paid to the
exporter against the availised promissory notes or bills of exchange.
- 100 per cent financing : Without recourse and not
occupying exporter's credit line That is to say once the
exporter obtains the financed fund, he will be exempted
from the responsibility to repay the debt.
- Improved cash flow : Receivables become current cash in
flow and its is beneficial to the exporters to improve
financial status and liquidation ability so as to heighten
further the funds raising capability.
- Reduced administration cost : By using forfeiting
, the exporter will spare from the management of the
receivables. The relative costs, as a result, are reduced greatly.
- Advance tax refund: Through forfeiting the
exporter can make the verification of export and get tax refund
in advance just after financing.
- Risk reduction : forfeiting business enables the
exporter to transfer various risk resulted from deferred payments,
such as interest rate risk, currency risk, credit risk, and
political risk to the forfeiting bank.
- Increased trade opportunity : With forfeiting, the
export is able to grant credit to his buyers freely, and thus, be more
competitive in the market.
Forfeiting provides the banks following benefits:
- Banks can offer a novel product range to clients, which enable the
client to gain 100% finance, as against 8085% in case of other discounting
- Bank gain fee based income.
- Lower credit administration and credit follow up.
Definition of Factoring
Definition of factoring is very simple and can be defined as the conversion
of credit sales into cash. Here, a financial institution which is usually a bank
buys the accounts receivable of a company usually a client and then pays up to
80% of the amount immediately on agreement. The remaining amount is paid to the
client when the customer pays the debt. Examples includes factoring against
goods purchased, factoring against medical insurance, factoring for construction
Characteristics of Factoring
1. The normal period of factoring is 90150 days and rarely exceeds more than
2. It is costly.
3. Factoring is not possible in case of bad debts.
4. Credit rating is not mandatory.
5. It is a method of offbalance sheet financing.
6. Cost of factoring is always equal to finance cost plus operating cost.
Different Types of Factoring
1. Disclosed Factoring
In disclosed factoring, client’s customers are aware of the factoring agreement.
Disclosed factoring is of two types:
Recourse factoring: The client
collects the money from the customer but in case customer don’t pay the amount
on maturity then the client is responsible to pay the amount to the factor. It
is offered at a low rate of interest and is in very common use.
Nonrecourse factoring: In nonrecourse factoring,
factor undertakes to collect the debts from the customer. Balance amount is paid
to client at the end of the credit period or when the customer pays the factor
whichever comes first. The advantage of nonrecourse factoring is that
continuous factoring will eliminate the need for credit and collection
departments in the organization.
In undisclosed factoring, client's customers are not notified of the factoring
arrangement. In this case, Client has to pay the amount to the factor
irrespective of whether customer has paid or not.
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