Factoring & Forfaiting: Junior Level Presentation Compiled by V.V.S. Rao

Factoring & Forfaiting
Junior level presentation

Compiled by V.V.S. Rao
Factoring
Factoring
Introduction
 Factoring means undertaking to finance and collect
account Receivables
 Can be in domestic or international trade
 Usually undertaken by a Bank or a Financial Institution
 The buyer and seller usually have long term relationship
 Factoring enables the companies to sell their outstanding

book debts for cash
Factoring
Process
 It is an ongoing arrangement between a “Seller” (Customer of
"Factor") and “Factor” (the banker)
 Sales invoices will be raised on “Open Account” basis on the

Buyers by the Sellers.
 These invoices are regularly assigned by Sellers (Customers of

“Factor”) to the “Factor”
 The “Factor” will undertake:

 Financing
 Collection
 Sales Ledger Administration
 The “Seller “ assigns his right of recovery on the invoices to the

“Factor” at a discount to raise short term working capital finance
 The “Factor” may or may not accept the underlying

Factoring
Types of factoring
There are two types of factoring:
i. Recourse factoring (with recourse)

ii. Non-Recourse factoring (without recourse)
Recourse factoring:
The Factor has got the right to recover the amount advanced from the Seller
(Client of "Factor") in case of non-payment of the invoice by the buyer.
Non-Recourse factoring:
In case of non-payment, the “Factor” will bear the risk of bad debts
This means the “Factor” provides to the client the both finance and credit
protection
Factoring
Operation
 The “Factor” operates by buying from the selling
company, their invoiced debts.
 These are purchased usually with credit protection by the

“Factor”
 The “Factor” is responsible for:
 Credit control
 Collection
 Sales accounting work
 Thus management of the company can concentrate on

production and sales
Factoring
Operation
 Various MIS reports such as will be provided by the “Factor” to
the seller:
 Debtors ageing analysis

 Weekly statement of accounts
 Sales analysis
 Statement of outstanding invoices
 Usually before providing advance payments to the supplier; an

agreement is entered with the supplier for assigning the debts
 Sub-limits for each purchaser could be fixed by the “Factor”
 “Factor” will register their right of assignment with the

purchaser
Factoring
Advantages of Factoring
 Factoring replaces high cost market credit and enables purchases on
cash basis for availing cash discounts
 The seller gets instant finance against invoices
 Low margin (normally 20%) which will improve cash flow of

seller
 Seller gets large credit / grace period
 Each invoice is followed-up for payment by the “Factor” till

payment is made by the due date and even thereafter.
 MIS reports and Ledger administration is taken care by the

“Factor”
FACTORING
VS
BILLS DISCOUNTING
BILL DISCOUNTING FACTORING

1. Bill is separately examined 1. Pre-payment made against
and discounted. all unpaid and not due
invoices purchased by
Factor.
2. Financial Institution does 2. Factor has responsibility

not have responsibility of of Sales Ledger
Sales Ledger Administration and
Administration and collection of Debts.
collection of Debts.
3. No notice of assignment 3. Notice of assignment is

provided to customers of
provided to customers of
the Client.
the Client.
FACTORING
VS
BILLS DISCOUNTING (CONTD…)
BILLS DISCOUNTING FACTORING

4. Bills discounting is usually 4. Factoring can be done
done with recourse. without or without recourse
to client. In India, it is done
with recourse.
5. Financial Institution can get

5. Factor cannot re-discount
the bills re-discounted
the receivable purchased
before they mature for
under advanced factoring
payment.
arrangement.
Forfaiting
Forfaiting
Definition
Forfaiting is a means of finance (credit)
which an exporter of goods avails
from an intermediary called the “Forfaiter”
against the export receivables
without the obligation to repay the credit

Forfaiting
Purpose
 Forfaiting is used in International trade transactions
 It is nothing but discounting of trade receivables such

as:
 Drafts drawn under Letters of Credit
 Bills of Exchange
 Promissory Notes
 Any other freely negotiable instruments
 Forfaiting is done on “No Recourse” basis
i.e. In case if importer / drawee fails to make payment

on the due date the “Forfaiter” can not claim from the
exporter refund of the credit provided
Forfaiting
Operation
 Exporter can grant attractive credit terms to foreign
buyers, without sacrificing his own cash flows.
 Exporter is free of the risks of possible late payment or

default by the buyer (Importer)
 Exporter is fully protected against volatility in interest rates

and exchange rates.
 The above is possible since all these risks are passed on to

the Forfaiter
 Forfaiting is a highly effective sales tool, which

simultaneously improves cash flow and eliminates risk for the
exporter
Forfaiting
Mechanism of Forfaiting
Contd in Next Slide)

Forfaiting
Mechanism of Forfaiting (…..contd)
Contd in Next Slide)

Forfaiting
Mechanism of Forfaiting (…..contd)
Forfaiting
Advantages of Forfaiting
FACTORING VS. FORFAITING
POINTS OF FACTORING FORFAITING

DIFFERENCE
Extent of Finance Usually 75 – 80% of the 100% of Invoice value
value of the invoice
Credit Factor does the credit The Forfaiting Bank

Worthiness rating in case of non- relies on the
recourse factoring creditability of the
transaction Avalling Bank.
Services provided Day-to-day administration No services are
of sales and other allied provided
services
Recourse With or without recourse Always without

recourse
Sales By Turnover By Bills

COMPARATIVE ANALYSIS
BILLS FACTORING FORFAITING

DISCOUNTED
1. Scrutiny Individual Sale Service of Sale Individual Sale
Transaction Transaction Transaction
2. Extent of Upto 75 – 80% Upto 80% Upto 100%
Finance
3. Recourse With Recourse With or Without
Without Recourse
Recourse
4. Sales Not Done Done Not Done
Administration
5. Term Short Term Short Term Medium Term
6. Charge Hypothecation Assignment Assignment

Creation
Forfaiting

Factoring & Forfaiting: Junior Level Presentation Compiled by V.V.S. Rao

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Factoring & Forfaiting

Junior level presentation

 Can be in domestic or international trade

 Usually undertaken by a Bank or a Financial Institution

 The buyer and seller usually have long term relationship

 Factoring enables the companies to sell their outstanding

 Sales invoices will be raised on “Open Account” basis on the

 These invoices are regularly assigned by Sellers (Customers of

 The “Factor” will undertake:

 The “Seller “ assigns his right of recovery on the invoices to the

 The “Factor” may or may not accept the underlying

i. Recourse factoring (with recourse)

 These are purchased usually with credit protection by the

 The “Factor” is responsible for:

 Thus management of the company can concentrate on

 Debtors ageing analysis

 Usually before providing advance payments to the supplier; an

 Sub-limits for each purchaser could be fixed by the “Factor”

 “Factor” will register their right of assignment with the

 The seller gets instant finance against invoices

 Low margin (normally 20%) which will improve cash flow of

 Seller gets large credit / grace period

 Each invoice is followed-up for payment by the “Factor” till

 MIS reports and Ledger administration is taken care by the

BILL DISCOUNTING FACTORING

2. Financial Institution does 2. Factor has responsibility

3. No notice of assignment 3. Notice of assignment is

BILLS DISCOUNTING FACTORING

5. Financial Institution can get

Forfaiting is a means of finance (credit)

which an exporter of goods avails

from an intermediary called the “Forfaiter”

against the export receivables

without the obligation to repay the credit

 It is nothing but discounting of trade receivables such

 Forfaiting is done on “No Recourse” basis

i.e. In case if importer / drawee fails to make payment

 Exporter is free of the risks of possible late payment or

 Exporter is fully protected against volatility in interest rates

 The above is possible since all these risks are passed on to

 Forfaiting is a highly effective sales tool, which

Contd in Next Slide)

Contd in Next Slide)

POINTS OF FACTORING FORFAITING

Credit Factor does the credit The Forfaiting Bank

Recourse With or without recourse Always without

Sales By Turnover By Bills

BILLS FACTORING FORFAITING

6. Charge Hypothecation Assignment Assignment

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