Forfaiting &

Export
Factoring

Presented by:
DEBARATI ROY CHOWDHURY (Roll No.11)
RAGINI MATHUR (Roll No.31)
RITIKA CHANGIA (Roll No.35)
ROHIT GUPTA (Roll No.36)
UTKARSH KHANDELIA (Roll No.47)
 What is Forfaiting
Forfaiting is a method of trade finance that allows exporters to obtain cash by
selling their medium and long-term foreign accounts receivable at a discount on
a “without recourse” basis.

A forfaiter is a specialized finance firm or a department in a bank that performs

non-recourse export financing through the purchase of medium and long-term
trade receivables.

Forfaiting eliminates virtually all risk to the exporter, with 100 percent financing
of contract value.
Typical Forfaiting Transaction
 Structure of a Typical L/C Forfaiting Arrangement

Source : Mizuho Bank

 • Credit is extended to the importer for a
period of between 180 days and seven years.
• The minimum bill size is normally $250,000,
although $500,000 is preferred.
Characteristics • The payment is normally receivable in any
of Forfaiting major convertible currency.
• A letter of credit or a guarantee is made by a
bank, usually in the importer's country.
• The contract can be for either goods or
services.
 • Requires an underlying documentary payment
obligation from the commercial transaction (e.g.
bills of exchange, letter of credit, promissory
notes) independent from the Contract of Sale
Core • The underlying payment obligation may
Features Of sometimes require a guarantee
• Forfaiting is usually taken without recourse to
Forfaiting the Exporter given the strength of the
independent payment obligation of the Issuing
Bank
• Secondary markets exists for forfaiting
Advantages & Disadvantages of Forfaiting

• Pros
• Eliminates the risk of non-payment by foreign buyers .
• Offers strong capabilities in emerging and developing markets
• Conversion of a credit transaction into cash transaction
• Increase of Liquidity
• Cons
• Cost is often higher than commercial lender financing .
• Non-Availablity to financially weak countries
• Dominance of Western Currencies
• Limited to medium and long-term transactions and those exceeding $100,000
Export Factoring

• Export factoring is a complete financial package that combines export

working capital financing, credit protection, foreign accounts receivable
bookkeeping, and collection services.
• A factoring house, or factor, is a bank or a specialized financial firm that
performs financing through the purchase of invoices or accounts receivable.
• Factoring is suited for continuous short-term export sales of consumer
goods on open account terms.
• It offers 100 percent protection against the foreign buyer’s inability to pay—
no deductible or risk sharing.
Factoring Process
 • Factor usually assumes responsibility for collecting
the debts and administering the company’s ledger.
• Can be either recourse or non-recourse (accounting
treatment): where non-recourse, the financier may
take the benefit of any credit insurance policy.
Core Features • Differs from Receivables Discounting, in Receivables
Discounting the business is responsible for collecting
Of Factoring its debts and administering its company’s ledger.
• In addition to financing benefits the Factor will offer
a risk mitigant protection against buyer insolvency.
• Ownership of receivables will lie with the Factor,
and the buyer settles invoices with the Factor
directly instead of the Seller
Key Differences Between Factoring and
Forfaiting
Factoring is used in both domestic and international trade, whereas forfaiting is only used in
international trade financing. Letters of credit are not involved in factoring, but they are part of the
forfaiting process.

Factoring generally only provides 80 to 90 percent of the amount of the accounts receivable, but
forfaiting can provide up to 100 percent of the amount of the invoices.

Another point to bear in mind is that factoring involves accounts receivables, whereas forfaiting deals
with negotiable instruments (such as bills of lading, promissory notes, etc.).

Because forfaiting is based on negotiable instruments, there is a secondary market for forfaiting in which
those instruments can be bought and sold, thus increasing the liquidity of forfaiting. 5