Factoring vs Forfaiting

Factoring:

Is a process when a company/entity buy a invoices from another company. Factoring is also seen as a form of invoice discounting.

In this purchase, accounts receivable are discounted in order to allow the buyer to make a profit upon the settlement of the debt. Essentially factoring transfers the ownership of accounts to another party that then being paid up.

Factoring therefore relieves the first party of a debt for less than the total amount providing them with working capital to continue preparing goods or buy raw material, while the buyer, or factor, chases up the debt for the full amount and profits when it is paid. The factor is required to pay additional fees, typically a small percentage, once the debt has been settled. The factor may also offer a discount to the indebted party.

Factoring is a very common method used by exporters to help accelerate their cash flow. The process enables the exporter to draw up to 80% of the sales invoice’s value at the point of delivery of the goods and when the sales invoice is raised.

Refer below image fir Better understanding:


Now let's understand about Forfaiting:

Forfaiting :

Is the purchase of an exporter's receivables – the amount that the importer owes the exporter – at a discount by paying cash. The purchaser of the receivables, or forfaiter, must now be paid by the importer to settle the debt. This is a common process used for speeding up the cash flow cycle and providing risk mitigation for the exporter on 100% of the debts value.

As the receivables are usually guaranteed by the importer's bank, the forfaiter frees the exporter from the risk of non-payment by the importer. When a forfaiter purchases the exporter’s receivables directly from the exporter then it is referred to as a primary purchase. The receivables technically then become a form of debt instrument that can be sold on the secondary market as bills of exchange or promissory notes, this is known as a secondary purchase.

Image example for Forfaiting:


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Chandan Kumar Yadav
My name is Chandan Kumar Yadav CDCS, CSDG, CITF, PGDIBO,AML-KYC, CCFE, MLIBF, CSF, 6SIGMA a trade finance professional with an experience of 11 years whereas worked with several stages of letter of credit, bank guarantee and on other payments methods of trade transactions such as documentary collection, open accounts, SBLC etc., I have a fair understanding of Trade Based Money Laundering as well, Blogging related to Trade Finance is my passion and I want to share which I know and learn from others, I have worked with Wells Fargo, Yes Bank Limited and Bank of America, India which helped me to gain knowledge, view of Trade Finance and importance of International Trade in world's economy. Trade Finance is thumping product, everyday we are learning something new so in order to keep learning I started this as one of the platform. . Let's Learn Together

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