INTERNATIONAL

TRADE
FACTORING

• Definition –
“Financial transaction whereby a business sells
its accounts receivable to a third party called a
factor (financial institution) at a discount in
exchange for immediate money with which to
finance continued business.”

• Financial option for the management of

receivables
FLOW CHART OF FACTORING

(1) Credit Sale

of Goods

Customer Client
(2) Invoice

(5) Pays the amount (6) Pays

(In recourse type the (3)
customer pays balance Submit
through client) (4) Invoice
Payment Copy
upto 80%
initially
Factor
FACTORING ARRANGEMENTS
Factoring Arrangements

Recourse

Disclosed FACTORING Undisclosed

Non–Recourse
TYPES OF FACTORING

FACTORING

TWO DIRECT BACK TO

FACTOR IMPORT & BACK
SYSTEM EXPORT FACTORING
FACTORING
TWO FACTOR SYSTEM

• Use of two factors, one in each country, dealing with the

exporter and the importer

• Importer advances funds to the import factor who then

transmits them to the export factor

• System involves three agreements –

– exporter and the importer
– export factor and the exporter
– between the factors Importer Exporter
& Import & Export
Factor Factor
DIRECT IMPORT & EXPORT
FACTORING

• Direct import factoring: Connotes the

situation where the exporter assigns debts
to a factor in the country of the debtor

• Direct export factoring: Factor is

appointed in the exporter’s own country
and deals with all the aspects of the
factoring arrangement including the
provision of financing and the assessment
of the financial position of the importer
BACK TO BACK FACTORING

• Back to back factoring: Arrangement most

suitable for debts owed by the exclusive
distributors of products to their suppliers
• The exporter enters into a factoring
agreement with the export factor who
contracts with import factor.
• Difference is existence of a separate factoring
agreement between the import factor and the
distributor
• Right to set off credits arising from the
domestic sales of the distributor with his
debts to the supplier
FORFAITING
Forfaiting

• Definition –
Forfaiting is a method of trade finance that allows
exporters to obtain cash by selling their medium term
foreign account receivables at a discount on a
“without recourse” basis

• It virtually eliminates the risk of nonpayment, once

the goods have been delivered to the foreign buyer in
accordance with the terms of sale
FLOW CHART OF FORFAITING
Flow Chart - Forfaiting
 STRENGTH OF FORFAITING

• Enables the exporter to offer his customers fixed rate credit

for the purchase of the goods
• Forfaiting is quick and simple to arrange; the procedures are
straightforward and the documentation is of standard format
• Forfaiting relieves the exporter from the risk of payment
default; financing is made without recourse
• Credit-based exports are turned into cash deals, thereby
improving liquidity and keeping bank credit lines open
• Currency risk is limited to the period from concluding the
sales contract until the date of discount
• 100% of contract value can be financed and the origin of the
goods is irrelevant
BENEFITS OF FORFAITING

• Eliminates Risk

• Enhances Competitive Advantage

• Improves Cash Flow

• Increases Speed and Simplicity of

Transactions
FACTORING VERSUS FORFAITING

• Factoring is the revolving sale of all or at least a

majority of a company’s receivables to a factoring
company. The acceptable tenor of the receivables is
usually maximum 180 days. A few factoring
companies accept also tenors of up to 360 days.

• Forfaiting is the single sale/purchase of a single

transaction. The deal itself has to be documented and
assigned properly. The maximum forfaitable tenor
depends on the possibilities of the Forfaiters in the
market i.e. their available country and banklimits.