Presentation On

Factoring & Forfeiting

By:-
HARISH SHIEKH – 17
SATISH C. TIWARI – 18
VINOD TIWARI - 21

02/26/10 1
 Why we need Factoring?

 For Smooth cash flow

 For meeting working capital needs

 Overcome the situation from high cost

of capital and reduced profit

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Factoring Services - Concept
Definition:
 Factoring is defined as ‘a continuing legal
relationship between a financial institution
(the factor) and a business concern (the
client), selling goods or providing services to
trade customers (the customers) on open
account basis whereby the Factor purchases
the client’s book debts (accounts receivables)
either with or without recourse to the client
and in relation thereto controls the credit
extended to customers and administers the
sales ledgers’.
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 Factoring functions..
 It is purchasing & collection the client’s
a/c’s receivables (with or without
recourse),
 Sales Ledger management
 Credit investigation & undertaking of
risks
 Provision of finance against debts
 Rendering consultancy services

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Factoring Services - Concept

Deliver of goods

Client Customer
Order placed

Client submits invoice

Customer pays
Factor-Prepayment

Monthly statements

Factor

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Funding Process

 Fax the copy of invoice to factor

 Factor processes the invoice
 Get up to 80% of the invoice in 24 hours
 20% kept in reserve account
 Factor receives the payment from customer
 Factor deducts fee from reserve account
 Factor forwards the balance from reserve

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Types of Factoring Services

 Full Service factoring or w/o recourse

factoring
 Standard Factoring
 Factor Assumes Credit Risk
 With Recourse Factoring
 Factor does not assume credit risk
 If debtors not paid, clients have to take the work
for collection

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 Maturity Factoring
 Collection Factoring
 Paid to clients only when factor gets money

 Bulk Factoring
 Disclosed Factoring
 Provides Finance after disclosing the fact of
assignments

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 Invoice Factoring
 Only provides finance against invoices
 All other works have to be done by clients

 Agency Factoring
 Factor and Client share the work
 The Factor has to provide finance and assume
risk

 International Factoring
 Done with exporters
 Facilitated with the help of export factor and
import factor

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Two-Factor System of
Factoring
 There are usually four parties to a cross-
border factoring transactions
 Exporter (client)
 Importer (customer)
 Export Factor
 Import Factor
 Two factor system results in two separate but
inter-linked agreements
 Between exporter and export factor
 Between export factor import factor

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Two-Factor System of
Factoring
 Functions of factors are divided between
export factor and import factor
 Import factor provides a link between export
factor and the importer and serves to solve
the international barriers like language
problem, legal formalities and so on. He also
underwrites customer trade credit risks,
collects receivables and transfers funds to
the export factor in the currency of the invoice

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 Country A Country B
Goods and invoices – Stage I
Exporter Importer

Copy Invoice Stage II Payments

Stage VI

Prepayments Stage III

Statements Stage V

Export Factor Copy Invoices Stage IV Import Factor

Payments Stage VII

Payment of Commission Stage VIII

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Benefits Of Factoring
 Financial Services
 Collection Service
 ‘Credit Risk’ Service
 Provision of expertise ‘sales ledger management’
service
 Consultancy service
 Economy in Servicing
 Off-balance sheet financing
 Trade Benefits
 Miscellaneous service

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What is Forfaiting ?
 “Forfait” is derived from French word “a forfait”
which means forfeiting or surrender of rights
 It is a mechanism of financing exports
 by discounting export receivables
 evidenced by Bills of Exchange or Promissory Notes
 without recourse to the seller (viz exporter)
 carrying medium to long term maturities
 on a fixed rate basis (discount)
 upto 100 per cent of the contract value

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Forfaiting..
It is a highly flexible technique that allows an Exporter
to grant attractive credit terms to foreign Buyers,
without tying up cash flow or assuming the risks of
possible late payment or default. Simultaneously, the
Exporter is fully protected against interest and/or
currency rates moving unfavourably during the credit
period

Forfaiting is a highly effective sales tool, which

simultaneously improves cash-flow and eliminates
risk.

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 Six Parties in Forfaiting
1. Exporter (India)
2. Importer (Abroad)
3. Exporter’s Bank (India)
4. Importer’s/Avalising Bank (Abroad)
5. EXIM Bank (India )
6. Forfaiter (Abroad)

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Forfaiting : 8 Steps
1. Commercial contract : Exporter & Foreign
Buyer
2. Commitment to Forfait BE , Pro Notes
3. Delivery of Goods by Exporter to Buyer
4. Delivery of BE / PN to Bank to EXIM Bk
5. Endorsement of BE / PN without recourse
6. Cash Payment/ thro’ a Nostro Account
7. Presentation of BE / PN to Buyer on maty
8. Payment of Debt Instrument on maturity
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Benefits to Exporters
 Converts a Deferred Payment export into a
cash transaction, improves liquidity
 Frees Exporter from cross-border political or
commercial risks associated
 Finances upto 100 percent of export value
 It is a “Without Recourse” finance
 Hedges against Interest and Exchange Risks

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Benefits to the importer
 The Importer can match repayments to projected
revenues, allowing for grace periods.
 The Importer can obtain 100% financing, and avoid
paying out cash in advance.
 The Importer can pay interest on a fixed rate basis for
the life of the credit, which will make budgeting
simpler and safer.
 The Importer can access medium to long term
financing which may be prohibitively expensive or
completely unavailable locally.
 The Importer may be able to take advantage of export
subsidy schemes which are often available from the
Exporter's government.

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Drawbacks of forfaiting

 Non-availability for short Periods

 Non-availability for financially weak countries
 Dominance of western currencies
 Difficulty in procuring international bank’s
guarantee

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DIFFERENCE BETWEEN
FACTORING AND FORFAITING
1.Suitable for ongoing open
account sales, not backed
by LC or accepted bills or
exchange.
2. Usually provides financing
for short-term credit period
of upto 180 days.
02/26/10
1. Oriented towards single
transactions backed by LC
or bank guarantee.
2. Financing is usually for
medium to long-term credit
periods from 180 days upto
7 years though shorterm
credit of 30–180 days is
also available for large
transactions.
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DIFFERENCE BETWEEN
FACTORING AND FORFAITING
3.Requires a continuous 3. Seller need not route or
arrangements between commit other business to
factor and client, whereby the forfaiter. Deals are
all sales are routed through concluded transaction-wise.
the factor.
4. Factor assumes 4. Forfaiter’s responsibility
responsibility for collection, extends to collection of
helps client to reduce his forfeited debt only. Existing
own overheads. financing lines remains
unaffected.

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DIFFERENCE BETWEEN
FACTORING AND FORFAITING
5. Separate charges are 5. Single discount charges is
applied for
— financing
— collection
— administration
— credit protection and
— provision of information.
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applied which depend on
— guaranteeing bank and
country risk,
— credit period involved
and
— currency of debt.
Only additional charges is
commitment fee, if firm
commitment is required
prior to draw down during
delivery period.
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DIFFERENCE BETWEEN
FACTORING AND FORFAITING
6. Service is available for 6. Usually available for
domestic and export export receivables only
receivables. denominated in any
7. Financing can be with freely convertible
or without recourse; the currency.
credit protection 7. It is always ‘without
collection and recourse’ and
administration services essentially a financing
may also be provided product.
without financing.

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 List of some
Forfaiters
 Standard Bank, London

 Hong Kong Bank

 Indo Aval
 ABN AMRO Bank
 Meghraj Financial Services
 Triumph International Finance India Ltd.,
 Natwest Bank
 West LB + EXIM Bk + IFC : GTF, India

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Suggested websites
 www.forfaiting.com
 www.forfaiting.co.uk
 www.meridianfinance.com
 www.mezraforfaiting.com
 www.londonforfaiting.com
 www.eximbankindia.com
 www.ecgcindia.com
 www.afia-forfaiting.org
 www.indianexportregister.com

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 Books on Forfaiting
 Ref : Mezra / London Forfaiting
 Forfaiting for Exporters by Andy Ripley :
Amazon.com
 Forfaiting (1986) by Ian Guild
 EXIM Bank of India Booklet
 Indian Institute of Bankers, Mumbai Booklet
 NIBM, Vinimaya
 ICFAI – Chartered Financial Analyst

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 Thanks
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