Final difference btw factoring & forfeiting

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Factoring & forfeiting
Hanoi university-FMTTut 1 FB08
Contents
1. Factoring
2. Forfeiting
3. Factoring vs. Forfeiting
I. Factoring
1. Definition
o
A “continuing arrangement” between a financial
institution (the factor) and a business concern
(the client) selling goods or services to trade
customers (the customer) whereby the factor
purchases the client’s accounts
receivables/book debts

o
Simple definition: it is the conversion of credit
sales into cash
www.themegallery.comCompany Name
I. Factoring (cont.)
2. Process of international factoring
3. Set up relationship
Exporter
Importer
Import factor
Export factor
4. Collect money from Importer
1. Ship goods
2. Sell account receivables

5. Give money
6. Pay money
I. Factoring (cont.)
3. Advantages to exporter

Being provided with commercial credit
 increase competitive & export ability

Risk of non-payment is reduced because
of import factor

Increase the liquidity

Reduce the bad debts on the balance
sheet

Reduce the cost of book keeping & debt
collection

Language & local law problems are dealt
by factors
I. Factoring (cont.)
4. Advantages to importer

Pay invoices in the country locally, deals
with the local agency, i.e. the Import
Factor

Minimum documentation required


The cost of Letters of Credit and delay on
account of LC’s are eliminated.

All communication is in his own language

Being advised about other related services
by factors
II. Forfeiting
1. Definition

Export fixed interest trade financing

Purchasing of obligations falling due at
some future date

Without recourse

Up to 100% financing
II. FORFAITING (cont.)
PROCESS
II. FORFAITING (cont.)
3. Advantages & Disadvantages to exporter
Advantages:
- 100% financing
-
Improved cash flow
-
Reduced administration costs
-
Risk reduction

-
Increased trade opportunity
Disadvantages:
-
High fee charged
II. FORFAITING
4. Advantages & Disadvantages to importer
Advantages:
-
Can obtain 100% financing
-
Can enjoy medium & long term financing with less
cost
-
Fixed rate interest  easy to make budgeting
-
Avoid credit limit by banks
Disadvantages:
- Fee for availing bank
- High fee and discounting interest  put up the price
of good
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III. Factoring Vs Forfeiting
Criteria Factoring Forfeiting
Extent of
Finance
- About 80% of the
invoice value
-
100% of the value of the

invoice
Credit
Worthiness
-The Factor does the
credit rating in case of
without recourse
- The Forfeiter relies on
the creditability of the
availing bank
Recourse
- With or without
recourse
- Always without recourse
III. Factoring Vs Forfeiting (cont.)
Criteria Factoring Forfeiting
Services
provided
- Day to day
administration of sales
and other allied services
- No service provided
Term
- Short term - Medium and long
term
Charges
-
Separate charges
applied for
+ Financing,
+ Collection,

+ Administration,
+ Provision of
information
-
Single discount
charge is applied
depends on
+ Guaranteeing bank
and the country risk
+ Credit period
involved
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Thank You !