Factoring and Forefaiting

Factoring
Definition: Factoring implies a financial arrangement between the factor and client
(firm), in which the client gets advances in return for receivables, from a financial
institution (factor). It is a financing technique, in which there is an outright selling
of trade debts by a firm to a third party, i.e. factor, at discounted prices.
Types of Factoring

Recourse Factoring
Non-recourse Factoring
Domestic Factoring
Export Factoring
Disclosed Factoring
Undisclosed Factoring
Advance Factoring
Maturity Factoring
Bulk Factoring
Agency Factoring
What is recourse factoring?
The client held responsible for the debt if the customers fail to pay.
The factoring company should make every effort to collect repayment on client’s behalf.
If unsuccessful it can demand compensation from client.

Client are required to buy back that invoice from the factoring company
Repay the funds it is currently owed

Attempt to collect the debt from customers by client itself.

Client must accept the loss if they cannot collect from your customers.
The client, the borrower, assume more of the risk associated with possible
nonpayment.
What is non-recourse factoring?
The factoring company assumes most of the risk of nonpayment by customers.
The factoring company is ultimately responsible for all attempts to collect payment
from customers.
If your customers don’t repay, the factoring company accepts that loss.
Difference between Recourse and Non-recourse factoring
• Recourse factoring − In this, client had to buy back unpaid bills receivables from factor.
• Non – recourse factoring − In this, client in which there is no absorb for unpaid invoices.
• Domestic factoring − When the customer, the client and the factor are in same country.
• Export factoring − It involves four parties, the exporter, the export factor, the import
factor and the importer. It is also called as cross border factoring.
• Disclosed factoring − If factor name is represented on the invoice of the goods or services
and asks customer to pay the factor.
• Undisclosed factoring − Factor is not mentioned on the invoice of the goods or services by
manufacturer.
• Advance factoring − In this, advance is paid to the client by factor against uncollected
receivables.
• Maturity factoring − In this, factor collects money from the customer and pays to firm on
due date or before.
• Bulk factoring − In this, full recourse can be done by client and administration and
collection is done by his own ways.
• Agency factoring − In this, finance and protection against bad debts is done by factor,
administration and collection is done by client.
Difference Between Factoring and Bills Discounting
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Factoring Regulation Act 2021

 Forfaiting
Forfaiting is a method of trade finance that allows exporters to
obtain cash by selling their medium and long-term finance
instruments such as bills of exchange, promissory note or deferred
payment letter of credit at a discount on a “Non-recourse” basis (the
non-payment risk passes to the forfaiter).
Forfaiting
 Forfeiting
1. Forfaiter and Exporter agreed upon a Forfaiting Agreement.
2. Sales Contract has been signed between Exporter and Importer.
3. Shipment is initiated by the exporter.
4. The importer obtains a guarantee from his bank.
5. The importer send documents to exporter
6. Exporter gives documents to forfaiter.
7. Forfaiter controls the documents pays for them as indicated on the
Forfaiting Agreement.
8. Forfaiter presents documents to bank at maturity date.
9. Importer pays to bank at maturity date.
10. Bank pays to forfaiter at maturity date.
Difference Between Factoring and Forfaiting

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Factoring Regulation Act

Factoring Regulation Act 2011

Factoring Regulation Amendment Act, 2021

The Factoring Regulation act of 2021 is aimed towards the expansion of credit
facilities available to Micro, Small, and Medium Enterprises (MSME) sectors.

It looks forward to helping them by allowing them access to funds from

9500 non-banking financial companies (NBFC).

The first provision: bringing change in various definitions of terms like

“receivable”, “assignment”, and “factoring business”. The aim is to bring these
terms up at par with global standards.
Receivables [Section 2(p)]-
Definition of the term ‘Receivables’ is entirely substituted. According to the new
definition, the receivables means-
• The money owned by the debtor; and
• Which is not yet paid to the assignor of goods/ services.
The term receivables as includes payment of any sum for the toll/ use of any
infrastructure facility/ services.

Assignment [Section 2(a)]-

• The definition of the term ‘assignment’ is entirely amended. The new definition
means the transfer by agreement to a factor of an undivided interest (whole or
part) of an assignor in the receivables due from the debtor. The assignment
includes transfer where the assignor or debtor is situated/ established outside
India.
Factoring Business [Section 2(j)]-
• The definition of the term ‘Factoring Business’ is amended. Amended definition
means acquisition of receivables of assignor by an assignment for a consideration.
The acquisition should be for collection of the receivables/ for financing against
such assignment.
Removal of threshold limit for Non-Banking Financial Company (NBFC)-
• As per earlier provisions, for NBFC to engaged in the factoring business must
have the financial assets in the factoring business and income from the factoring
business more than 50% of the total assets / gross income or more than the
threshold as notified by the Reserve Bank. The said condition is removed from
23rd August 2021.
• Provision to section 3(2) and explanation thereof is omitted vide the Factoring
Regulation (Amendment) Act, 2021. Accordingly, the threshold limit for NBFC to
be engaged in factoring business is removed.
Registration of transactions [Substitution of section 19(1)]-
• As per section 19(1) of the Factoring Regulation Act, 2011, every factor is
required to register the details of every transaction of an assignment of receivables
in their favor. Such details are to be recorded with the Central Registry set up
under the Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 [SARFAESI Act, 2002].
• Prior to amendment, such details were to be submitted within a period of 30 days
from the date of assignment/ establishment of registry. Post amendment, now, the
details are to be submitted within such time and in such manner as may be
prescribed.
Details to be filed by Trade Receivables Discounting System (TReDS)-
• As per newly inserted sub-section (1A) to section 19, the trade receivables
financed through TReDS needs to be filed with the Central Registry. The details
are to be filed by the TReDS on behalf of the factor.

Regulations by the Reserve Bank of India (RBI)-

• New section 31A is inserted to the Factoring Regulation Act, 2011, accordingly
the section empowers the Reserve Bank to make regulations for the manner of
granting of the registration certificate to a factor and to make regulations for the
manner of filing of the transactions with the Central Registry for trade receivables
financed through TReDS.