Factoring and Forfeiting

Dr.N.C.Rajyalakshmi
• Factoring:
• Involves the outright sale of receivables at
a discount to a factor to obtain funds.
• Factoring means an arrangement between
a factor and his client which includes at
least two of the following services to be
provided by the factor i. Finance ii.
Maintenance of Accounts iii. Collection of
debts iv. Protection against credit risk
 Functions of a Factor
• Maintenance / administration of sales
ledger.
• Collection facility/ of accounts receivable
• Financing facility/ trade debts
• Assumption of credit risk/ trade debts
• Provision of advisory services.
 Types of Factoring
• Recourse factoring :
Is the basis on which receivables are sold
to the factor with the understanding that all
credit risks would be borne by the firm.

• Non recourse factoring:

All credit risks would be borne by the
factor.
• Maturity factoring:
Is an arrangement under which the factor
does not make a prepayment to the client.

• Domestic factoring:
Is the factoring in which the buyer , seller –
supplier and factor are domiciled in the
same country
• Full factoring:
This is the most comprehensive form of
factoring combining the features of almost
all the factoring services specially those of
non recourse and advance factoring .
• Disclosed and undisclosed:
Name of the factor is disclosed in the
invoice by the supplier
 Factoring v/s Bill Discounting
• Bill discounting always with resource and
factoring can be with or without.
• The drawer undertakes the responsibility of
collecting the bills and remitting the proceeds ,
only factor does the collection.
• Bill discounting only finance, factor all functions.
• Discounted bills may be rediscounted , but
debts purchased for factoring can not be
rediscounted it can only be refinanced.
• Factoring implies provision of bulk finance,
bill discounting is individual, transaction
oriented.
• Factoring is off balance mode of financing.
• Bill discounting does not involve
assignment of debts as is the case with
fiancing.
 Forfaiting
• ‘Is a form of financing of receivables in
international trade’.
• Forfaiting is hundred percent financing
arrangement of receivables, factoring is
only partial ranging between 75-85%
• The availing bank which provides an
unconditional guarantee is a critical
element in forfating.
• On the other hand factoring deal (non recourse)
bases his credit decision on the credit standards
of the exporter.
• Factoring is a short term financing deal, forfaiting
finances notes/ bills arising out of deferred credit
spread over three to five years.
• Factor does not guard against exchange rate
fluctuation, forfaiter does charge a premium.