Factoring and Forfaiting

-A fund/fee based financial service

Prof. Nishant Dhruv, Atmiya College

What is Factoring ?

Definition:

Factoring provides resources to finance

receivables as well as facilitates the
collection of receivables

Financial Services, Nishant Dhruv,

Atmiya College

Functions

Provision for collection of credit sales

Administration of sales ledger

Financing Trade Debt (Credit Sales)

Credit Management and covering credit

risk involved
Financial Services, Nishant Dhruv,
Atmiya College

Types of Factoring

Recourse Factoring

Non-recourse Factoring

Advance and Maturity Factoring

Old line Factoring/Full Factoring

International Factoring

Financial Services, Nishant Dhruv,

Atmiya College

Mechanism of Factoring
1. Customer places order, client delivers
2.
3.
4.
5.
6.

good and sends invoice

Clients assigns invoice to factor
Factor makes prepayment (about 80%)
Monthly Statement of a/c to customers
Customer makes payment to factor
Factor makes balance 20 % payment to
client
Financial Services, Nishant Dhruv,
Atmiya College

Cost of Factoring Services

The factor provides various services at a

charge.

Costing can be segregated in two ways



Commission : a charge for collection8

Discount Charge: interest charge, for
short-term financing by factor between the
date of advance payment and date of
guaranteed payment
Financial Services, Nishant Dhruv,
Atmiya College

Legal Aspects of Factoring

Client serves a notice of assignment to customers

Client provides all evidences

A factor requires a power of attorney to assign

debts. Legal status of the factor is that of

assignee

Letter of disclaimer is required by factor in case of

multiple finance

Attracts stamp duty
Financial Services, Nishant Dhruv,
Atmiya College

Advantages of Factoring

To the client (Company)
 Conversion of credit sales into cash
 Competitive credit terms to buyers
 Free from tensions of monitoring sales ledger
 Close interaction among working capital & other
components
 Expand business

To the customer (Buyers)
 Facilitates credit purchases
 Save on bank charges
 Less paperwork
 Does not impinge on the customers rights
Financial Services, Nishant Dhruv,
Atmiya College

Cash Credit vis--vis Factoring

Cash Credit

Factoring

Margin retained 40-50%

Margin retained 20%

Client submits various statements to banks

Factor furnishes report

to both client and cust.

Banks do not render debt collection

Factor renders debt

collection services

No grace period allowed

Grace period allowed

Variable processing fees

Fixed processing fees

services

Financial Services, Nishant Dhruv,

Atmiya College

Bill Discounting vis--vis Factoring

Bills Discounting

Factoring

Always with Recourse

Can be either Recourse or Non recourse

Each bill to be individually accepted

One time notification taken from customer

Expensive source

Less expensive

More paperwork

Less paperwork

Facility only on Provision for Finance

Also provides other services

Submission of original
documents required

Only copies of such documents

It is shown in balance sheet

It is off balance sheet mode

No assignment of debts

Assignment of debts

Financial Services, Nishant Dhruv,

Atmiya College

Forfaiting

Forfaiting is the discounting of

international trade receivables on a
100% without (non) recourse basis.

Financial Services, Nishant Dhruv,

Atmiya College

Origin of Forfaiting

The term forfait is a french word which

means relinquish a right.

Forfaiting has been evolved in around

1960s.

In India, RBI approved forfaiting as an

export financing option in the year 1992.

Financial Services, Nishant Dhruv,
Atmiya College

Characteristics of Forfaiting

The exporter is insulated against the

possibility of default.

Trade receivables are required to be
denominated in a freely convertible
currency.

Credit period can range from 60 days to
10 years.

Forfaiting is flexible as well as tailormade.
Financial Services, Nishant Dhruv,
Atmiya College


An importers obligation is normally

supported by a local bank guarantee or

an aval.

Financial Services, Nishant Dhruv,

Atmiya College

Forfaiting is used in following

siuations:

Its more suitable for high value exports.

There should be request for deferred

payment for more than 60 days.

The contract is for atleast USD 1,00,000
or its equivalent, in a freely convertible
currency.

Either bank guarantee or letter of credit
should be available.
Financial Services, Nishant Dhruv,
Atmiya College


Commercial bank usually do not fund

credit risk beyond the period of 180

days. Hence8

Financial Services, Nishant Dhruv,

Atmiya College

Pricing of a Forfaiting
transaction

The pricing consist of four elements :




Interest Rate
Commitment Fees
Handling Fee

Financial Services, Nishant Dhruv,

Atmiya College

Flow chart of Forfaiting

Transaction
1. Commitment to purchase debt
2. Commercial Contract
3. Delivery of Goods
4. Gives Guarantee
5. Forwarding the documents
6. Delivers documents
7. Makes Payment (Advance Payment)
8. Present document on maturity
9. Repays at Maturity
10. Payment to forfaiter.
Financial Services, Nishant Dhruv,
Atmiya College

Difference Between Forfaiting

and Factoring
Forfaiting

Factoring

For International credit

For transactions of short-term

transactions of long-term maturity maturities

100% financing without recourse

Can be with or without recourse

Cost borne by importer (buyer)

Cost borne by seller(client)

A forfaiter and a bank involved

No bank involved
The entire sales ledger is
administered for some fixed fee

Sales ledger is not administered

Financial Services, Nishant Dhruv,

Atmiya College