What is the Difference Between Factoring and Forfeiting?

Factoring and forfaiting are two financial arrangements that help businesses manage cash flow and reduce risks, but they differ in nature, scope, and concept. Here are the main differences between factoring and forfaiting:

1. Type of trade: Factoring can be used in both domestic and international trade, while forfaiting is specifically for international trade financing.
2. Process: In factoring, a business sells its pending invoices (accounts receivables) to a third party, such as a bank, in exchange for immediate cash payment. In forfaiting, an exporter sells the rights to trade receivables to a forfaiter and receives instant cash.
3. Duration of receivables: Factoring typically deals with short-term accounts receivables, usually due within 90 days or less. Forfaiting, on the other hand, deals with medium to long-term accounts receivables.
4. Goods involved: Factoring involves the sale of receivables for ordinary or non-capital goods. Forfaiting involves the sale of receivables on capital goods.
5. Financing percentage: Factoring provides 80-90% finance, whereas forfaiting provides 100% financing of the value of the export.
6. Recourse: Factoring can be recourse or non-recourse, meaning the seller may or may not be liable for the payment if the buyer fails to pay the receivables. Forfaiting is always non-recourse, meaning the exporter is not liable when the importer fails to pay the receivables.
7. Secondary market: Factoring does not involve a secondary market for the receivables, while forfaiting has a secondary market where the receivables can be traded, enhancing liquidity and providing additional opportunities for investors.
8. Costs: In factoring, the seller or client pays for the factoring costs. In forfaiting, the overseas buyer pays for the forfaiting costs.

Comparative Table: Factoring vs Forfeiting

Factoring and forfaiting are two distinct financial arrangements used in trade finance. Here is a table highlighting the key differences between them:

In summary, factoring is a financial arrangement used for short-term domestic and international receivables, while forfaiting is an international trade finance mechanism used for medium to long-term receivables. The key differences include the type of trade, type of receivables, financing percentage, recourse, and the involvement of negotiable instruments.