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    Factoring and Forfaiting

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    nishadhar
    Factoring and forfaiting are forms of invoice financing that provide liquidity to firms. Factoring involves the sale of receivables from domestic sales to a factoring firm, which then takes on responsibility for credit management and collection. Forfaiting involves the purchase of foreign credit bills by a forfaiter without recourse to the exporter. Both methods provide financing and remove credit risk, though forfaiting focuses on medium-to-long term international trade receivables. Key differences are that factoring can be with or without recourse while forfaiting is always without recourse.

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    Factoring and Forfaiting

    Uploaded by

    nishadhar
    568 views21 pages
    Factoring and forfaiting are forms of invoice financing that provide liquidity to firms. Factoring involves the sale of receivables from domestic sales to a factoring firm, which then takes on responsibility for credit management and collection. Forfaiting involves the purchase of foreign credit bills by a forfaiter without recourse to the exporter. Both methods provide financing and remove credit risk, though forfaiting focuses on medium-to-long term international trade receivables. Key differences are that factoring can be with or without recourse while forfaiting is always without recourse.

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    Factoring and forfaiting are forms of invoice financing that provide liquidity to firms. Factoring involves the sale of receivables from domestic sales to a factoring firm, which then takes on responsibility for credit management and collection. Forfaiting involves the purchase of foreign credit bills by a forfaiter without recourse to the exporter. Both methods provide financing and remove credit risk, though forfaiting focuses on medium-to-long term international trade receivables. Key differences are that factoring can be with or without recourse while forfaiting is always without recourse.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    568 views21 pages

    Factoring and Forfaiting

    Uploaded by

    nishadhar
    Factoring and forfaiting are forms of invoice financing that provide liquidity to firms. Factoring involves the sale of receivables from domestic sales to a factoring firm, which then takes on responsibility for credit management and collection. Forfaiting involves the purchase of foreign credit bills by a forfaiter without recourse to the exporter. Both methods provide financing and remove credit risk, though forfaiting focuses on medium-to-long term international trade receivables. Key differences are that factoring can be with or without recourse while forfaiting is always without recourse.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 21

    FACTORING AND FORFAITING

    Factoring
    Latin Word- ‘facere’
    Originated –USA,UK and France to
    assits firms
    A relationship created by an
    agreement between the seller of
    goods/service and the financial
    institution(factor).
    Receivables arising out of sale of
    goods/service are sold by firm.And
    the said receivables is passes on to
    factor.And factor become
    responsible –sale accounting,credit
    Parties of Factoring

    Buyer of the goods


    Seller
    Factor i.e. financial institution
    Steps involved in factoring transaction

    SALEOF GOODS(2)

    AGREEMENT(1)

    SELLING FIRM FACTOR CUSTOMERS


    RECEIVABLES

    INVOICE COPY(3)

    ADVANCE PAYMENT/DISCOUNTING (4)

    FINAL PAYMENT AFTER DEDUCTING FEES PAYMENTS


    AND CHARGES,IF ANY(5)
    Types of Factoring

    A.Recourse and Non-recourse


    Factoring
    B.Advance and Maturity Factoring
    C.Conventional or Full factoring
    • Collection of receivables
    • Maintenance of sales ledger
    • Credit collection
    • Credit control
    • Credit Insurance
    • Credit risk

    D.Domestic and Export factoring


    E.Limited Factoring
    Types of Factoring (Cont…)

    F.Selected Seller Based Factoring


    G.Selected Buyer Based Factoring
    H.Disclosed and Undisclosed
    Factoring
    •

    •
    Functions of a Factor
    Administration of sellers sales
    ledger
    Collection of receivables
    purchased
    Provision of finance
    Protection against risk
    Advisory services-
    q Customer’s perception for client products
    q Marketing strategies, emerging trends
    q Suggests improvements-invoicing, delivery and sales
    return
    q Helping for raising finance from financial institutions
    ADVANTAGES
    § Cost savings
    § Liquidity
    § Credit discipline
    § Efficient production
    § Cash flow
    § Better purchasing planning
    § Avoid bad debt
    § Boosting the efficiency ratio
    Limitations of factoring

    No insurance available for credit


    Difficult for factor to collect
    money due, if buyer and seller
    are in different area
    Lack of professionalism
    ,competence, underdeveloped
    expertise, resistance to change
    Limited funds – supplier
    Lack of proper credit information

    Factoring cost
    • Commission
    q Charge for collection
    q Sale ledger administration
    q Credit control
    q Collection of debt
    q Providing protection against bad debt
    • Interest Charge
    •
    Factoring in India
    Factoring
    and forfaiting , was set up
    by RBI in 1988, under the
    recommendations of the
    Kalyansundaram committee
    •RBI guidelines:

    qPrior approval
    qSubsidiaries
    qExclusive business
    qReporting
    •
    Major factoring firms
    1.SBI FACS - First factoring company in
    1991(SBI,SIDBI,UBI)
    2.Canback factors-Canara Bank, Andhra
    bank and small industrial
    development bank(60:20:20)
    3.Foremost Factors- 1st private sector
    •New entrants are

    I. ICICI
    II.HSBC
    III.Global Trade finance(international
    factoring, domestic factoring and
    forfaiting services)
    Sl . Characteristic Factoring Bills Discounting
    No

    1 Recourse May be with or without Only with recourse


    recourse

    2 Collector Factor is a collector of Drawer is the collector of


    receivables receivables

    3 Services Besides financing Only financing facility is


    facility,many other available
    services are also
    extended

    4. Refinancing Receivables once factored Bills once discounted can be


    cannot be refactored rediscounted

    5 Bulk finance Financing arrangement Financing is bill based


    covers entire quantum of
    receivables

    6 Mode of accounting It is off balance sheet No such possibility


    financing
    FORFAITING
    French term - forfait
    A form of financing of receivables
    arising from international trade.
    A bank/financial institution
    undertakes the purchase of
    trade bills/promissory notes
    without recourse to the seller
    All risk become full responsibility
    of forfaiter
    Forfaiter pays cash to seller after
    Parties to forfaiting

    Exporter
    Importer
    Exporter’s bank
    Importer’s bank
    The forfaiter
    •
    Modus Operandi
    1.Commercial contract
    2.Transaction
    3.Notes acceptance
    4.Factoring contract
    5.Sale of notes
    6.Payment
    •
    Advantages of forfaiting
    Eliminates Risk
    Improves Cash Flows
    Fast, tailor-made financing
    solutions
    Commitments can be issued
    within hours/days depending on
    details.
    No restrictions on origin of export.
    Relieves the exporter from
    administration and collection
    Limitations
     Itis generally not available for short-
    term financing.
     The exporter is responsible for obtaining
    a bank guarantee for the buyer.
     The exporter is responsible for the
    quality/condition of goods, timeliness
    of delivery, overshipment, and
    contract disputes.
     Because of the required bank
    guarantee, the importer's bank line of
    credit is reduced by a corresponding
    amount.
     Interest costs and commitment fees
    Difference in factoring and
    forfaiting
     Factoring refers to  Forfaiting refers to
    domestic bill purchase discounting of
    and discount foreign credit bill
     A factor finances 75-85% in respect of
    of the account international trade.
    receivables and  A forfaiter discounts
    retains the balance as
    a reserve till the the entire value of
    actual payment is made the bill.
    on the date of  It is a pure financial
    maturity arrangement and its
     It may be with or always without
    without recourse. recourse
     Short term transactions  Financing for medium
    involving credit to long-term credit
    period of upto 180 periods is provided
    days are handled 
    but short term
     It is a continuous credit (30-180 days)
    arrangement. facilities are also
     Responsibility for  Collection of
    collection is forfaited debt
    accepted by factor only.
     Charges are applied  Single discount
    for financing, charge is made
    collection, sales depending on:
    adminis, credit Guaranteeing bank
    protection, and country risk,
    provision of credit period
    information involved, current
     No restriction on
    of debt and
    minimum size of additional charges
    transaction made during
    delivery period.
     Contract is between
     Minimum value of
    seller and factor
    USD$ 250.00 per
      Besides financing,a transaction
    factor also  Contract between
    provides other
    services such as exporter and
    ledger forfeiter

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