Since the last few decades, factoring and forfaiting have gained immense

importance, as one of the major sources of export financing. For a layman,

these two terms are one and the same thing. Nevertheless, these two terms are
different, in their nature, concept and scope. The first and
foremost distinguishing point amidst these two terms is that factoring can be
with or without recourse, but forfaiting is always without recourse. Have a
glance at this article, to know about some more differences between factoring and
forfaiting.
BASIS FOR COMPARISONFACTORINGFORFAITINGMeaningFactoring is an
arrangement that converts your receivables into ready cash and you don't need to
wait for the payment of receivables at a future date.Forfaiting implies a
transaction in which the forfaiter purchases claims from the exporter in return
for cash payment.Maturity of receivablesInvolves account receivables of short
maturities.Involves account receivables of medium to long term
maturities.GoodsTrade receivables on ordinary goods.Trade receivables on
capital goods.Finance up to80-90%100%TypeRecourse or Non-recourseNonrecourseCostCost of factoring borne by the seller (client).Cost of forfaiting borne
by the overseas buyer.Negotiable InstrumentDoes not deals in negotiable
instrument.Involves dealing in negotiable instrument.Secondary marketNoYes

Definition of Factoring
Factoring is defined as a method of managing book debt, in which a business
receives advances against the accounts receivables, from a bank or financial
institution (called as a factor). There are three parties to factoring i.e. debtor
(buyer of goods), the client (seller of goods) and the factor (financier). Factoring
can be recourse or non-recourse, disclosed or undisclosed.
In a factoring arrangement, first of all, the borrower sells trade receivables to the
factor and receives an advance against it. The advance provided to the borrower
is the remaining amount, i.e. a certain percentage of the receivable is deducted as
the margin or reserve, the factors commission is retained by him and interest on
the advance. After that, the borrower forwards collections from the debtor to the
factor to settle down the advances received.

Definition of Forfaiting
Forfaiting is a mechanism, in which an exporter surrenders his rights to receive
payment against the goods delivered or services rendered to the importer, in
exchange for the instant cash payment from a forfaiter. In this way, an exporter
can easily turn a credit sale into cash sale, without recourse to him or his
forfaiter.
The forfaiter is a financial intermediary that provides assistance in international
trade. It is evidenced by negotiable instruments i.e. bills of exchange and
promissory notes. It is a financial transaction, helps to finance contracts of
medium to long term for the sale of receivables on capital goods. However, at
present forfaiting involves receivables of short maturities and large amounts.
Key Differences Between Factoring and Forfaiting
The major differences between factoring and forfaiting are described below:
1.

Factoring refers to a financial arrangement whereby the business sells its

trade receivables to the factor (bank) and receives the cash payment. Forfaiting is
a form of export financing in which the exporter sells the claim of trade
receivables to the forfaiter and gets an immediate cash payment.

2.

Factoring deals in the receivable that falls due within 90 days. On the other
hand, Forfaiting deals in the accounts receivables whose maturity ranges from
medium to long term.

3.

Factoring involves the sale of receivables on ordinary goods. Conversely,

the sale of receivables on capital goods are made in forfaiting.

4.

Factoring provides 80-90% finance while forfaiting provides 100%

financing of the value of export.

5.

Factoring can be recourse or non-recourse. On the other hand, forfaiting is

always non-recourse.

6.

Factoring cost is incurred by the seller or client. Forfaiting cost is incurred

by the overseas buyer.

7.

Forfaiting involves dealing with negotiable instruments like bills of

exchange and promissory note which is not in the case of Factoring.

8.

In factoring, there is no secondary market, whereas in the forfaiting

secondary market exists, which increases the liquidity in forfaiting.
Conclusion

As we have discussed that factoring and forfaiting are two methods of financing
international trade. These are mainly used to secure outstanding invoices and
account receivables. Factoring involves the purchase of all receivables or all kinds
of receivables. Unlike Forfaiting, which is based on transaction or project.
FORFAITING & FACTORING Proper financing is a crucial part of any business, more so
in exports where the cost of finance is affected by domestic as well as international
factors. Availability of a variety of suitable financing options can encourage small
and medium export businesses where raising of money to finance exports is often
more an issue than actual receipt of orders. Conventional financing methods like
bank loans, equity financing etc. come with a lot of conditions and strings attached
which new or small exporters find difficult to meet. For instance new firms may find
it difficult to raise bank loans (since there is no proof that business will be viable, no
balance sheets to show healthy profits). Equity participation implies a more longterm commitment and accountability towards the shareholders. In this context the
two financing methods of factoring and forfaiting could provide viable options. Both
provide immediate cash to the exporter that virtually wipes out (for the exporter)
the credit period extended to the importer. This credit period extends from the time
of shipment of goods to the time of receipt of payment from the buyer abroad. The
credit period can extend from a couple of months to several years (in the case of
deferred payment contracts, project exports etc.) and hits the liquidity of many
export businesses. Forfaiting and factoring are similar in that a third (factoring or
forfaiting) agency takes over the accounts/trade receivables of the exporter at a
certain discount. The exporter in turn receives immediate reimbursement of the
receivables less the discount due to the factoring or forfaiting agency. However the
conditions and stipulations governing factoring and forfaiting are a little different.
Forfaiting The Government of India has recently permitted a new form of post
shipment financing called Forfaiting as part of its efforts to promote exports from
the country. Definition : Forfaiting is the sale by an exporter of export trade
receivables, usually bank guaranteed, without recourse to the exporter. Such

receivables include Letters of Credit (with or without Bills of Exchange) Promissory

Notes with Aval (guarantee), Bill of Exchange with Aval, Bank Guarantees Payable to
an Exporter in one country from an Importer in another country. Forfaiting as a
financing concept has been in use across the world since the 1960s. The word
forfait means to forgo one's right to something. In the context of export finance, the
exporter forgoes his right to receive payment from the importer at later date and
surrenders the right to collect payment to a third party or agency (known as
forfaiter). Instead the exporter receives an immediate reimbursement of his
payment less certain discounts from the forfaiter. Normally, these payments are due
at a later date, forcing the exporter to bear the cost for the intervening period, as
well as being exposed to the risks of exchange rate fluctuations, political situations
etc. These are risks which expose a small or medium exporter to significant erosion
of profits. With forfaiting finance, the exporter passes on his debts as well as
attendant risks to the forfaiting agency. This form of financing is referred to as
without recourse financing (in case the debt cannot be recovered there is no risk for
the exporter). Forfaiting is a medium term financing option typically for the three to
seven year time frame. Forfaiting comes with the following terms and conditions
there is a discounting of the amount to be received from the importer discounting is
on a fixed rate debt is in the form of bills of exchange or promissory notes
guaranteed by a bank such financing is without recourse to the seller 100% of the
amount receivable can be financed in this manner Forfaiting The Modus Operandi
The parties/agencies involved in a forfaiting transaction include the exporter, the
importer, a forfaiting agency, a bank that stands guarantee (aval) for the bills of
exchange or promissory notes (this is normally the importers bank) and the Exim
bank in India acts as the facilitating agency between the Indian exporter and the
forfaiting agency Typically the exporter negotiates terms like price, payment
currency, credit period and the like with their overseas buyer. The exporter then
approaches the Exim Bank with these terms. The Exim Bank obtains a tentative
forfaiting quotation from a forfaiting agency. Armed with this quote the exporter can
now finalise the contract with the buyer. The exporter should ensure that most of
the forfaiting charges are passed on to the buyer. Once the terms have been settled
with the buyer, a final forfeiting quote is obtained by the Exim Bank. If this quote is
acceptable, the exporter signs the contract with the buyer as well as a separate one
with the forfaiting agency. Once shipment of goods has taken place the exporter
obtains availed (guaranteed) bills of exchange from the importer (through a bank)
or availed promissory notes. These bills of exchange or promissory notes are
endorsed by the exporter and are routed to the forfaiting agency through the Exim
Bank. The forfaiting agency will then remit the payment due to the exporter to an
account of the exporter's bank in the country where the forfaiting agency is based.
This bank then transfers the amount to the exporter in India, and the exporter will
be provided with a Certificate of Foreign Inward Remittance as proof. When the
promissory notes/bills of exchange reach maturity, the forfeiting agency collects the
payment from the aval (the bank or agency Chapter_18
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stands guarantee irrespective of whether the importer has paid the aval).
FORFAITING COSTS In a forfaiting transaction the exporter has to bears the following
costs A commitment fee has to be paid to the forfaiter for the period of time from
when the commitment is entered into upto the date of discounting or date of expiry
of the contract. The commitment fee typically ranges between 0.5 to 1.5 per cent
per annum of the utilised portion of the forfait amount. This fee has to be paid
irrespective of whether the export takes place or not. The second, is the actual
discount fee which is the interest on the receivable amount for the entire period of
credit as well as a premium for the various risks involved. This fee is based on
prevailing market interest rates including LIBOR (London Inter Bank Offered Rate).
These are the two main costs involved. In addition there could be documentation
costs in case of a lot of paperwork, penalties, handling charges, etc. The Exim Bank
which acts as the facilitator also charges a service fee which can be paid in Indian
rupees. As per RBI regulations it is mandatory that the discount fees and any
documentation fees charged by the forfaiter should be passed on to the overseas
buyer. During shipping, it is not necessary that any of the forfaiting fees be shown
separately, they can be included in the FOB value indicated in the invoice. The
export contract can be executed in any of the major convertible currencies of the
world, in order to be eligible for forfeiting. FACTORING Factoring is a rather more
general term for a concept similar to forfaiting. Factoring is the non-recourse sale of
accounts receivables of a business on a daily, weekly, or monthly basis in exchange
for payment. It is a more short term financing based on accounts receivables of a
business. Factoring is prevalent in business in various ways. For instance in retailing,
the credit card business is a clear example of factoring. Factoring is often more
short-term than forfaiting and is applicable where receivables are due within around
180 days. Simply put factoring is the process of purchasing accounts receivable, or
invoices, from a business at a discount. Factors provide a vital financing service to
mostly small and medium-sized companies who are short of working capital. The
factor fills the money gap between the time a manufacturer or seller makes a sale
and the time the customer pays the bill. For this the factor charges a fee equal to
percentage of the invoices purchased. In the context of the export business, unlike
forfaiting, factoring is often with recourse. In a recourse agreement, the exporter
has to repurchase or pay for any invoices the factor cannot collect from the
exporter's customers. The factor still agrees to advance money, take on the
collection responsibility, and earn a fee for it. But if the customer doesn't pay, the
invoices are returned back to the exporter for payment. This eliminates any
financial risk for the factor, but unlike forfaiting increases the risk for the exporter.
Since the risk for the factor is less, factoring fees tend to be a lower percentage as
compared with forfaiting fees. Factoring does not provide safety from non-payment,
political risks and exchange rate fluctuations. Factoring is not fixed rate discounting
but depends on the prevalent exchange rate and political conditions at time of
maturity of payment. The need for cash is common to every business. Factoring
rescues these companies by providing them with the liquid assets, or cash, they
need to fuel their growth. Factoring can be particularly valuable for companies with

growth potential, but who need an accelerated cash flow to realize that potential. It
is additionally valuable for firms that are seeking new ways to reduce bad debts,
and small and mid-size companies that require working capital or are engaged in
seasonal industries. At the same time factoring is not for all companies. While the
advantages of factoring can be great, for some companies the cost would outweigh
the value of the services extended by factoring companies. For example, a company
serving a few major customers with excellent credit ratings would probably not
benefit from factoring. A company with no history, no assets, and no credit couldn't
hope for a bank loan, but as long as their customers are creditworthy, a factor or
forfaiter would be keen to do business with them. In essence the factor/forfaiter is
not extending credit to the exporter, but actually purchasing their invoices.
-invoices which represent cash due from their customers. So the factor is concerned
with the creditworthiness of the importer customer and not the exporter. As we
have seen, factoring and forfaiting are two forms of post shipment financing that
help exporters to overcome the hurdle of delay in repatriation of export sale
payments. This in turn increases liquidity and cash flow for the exporters business.
Forfaiting in particular does not curtail other borrowing since it is without recourse
to the seller and hence does not increase debt. Hence this is an additional rather
than an alternate financing method. Forfaiting and factoring are thus means by
which small an medium businesses can raise short to medium term finance that will
help them extend credit to their customers with low or no risks to themselves. This
is yet another key to helping Indian exporters get competitive in the international
marketing arena where not just quality and price but even payment terms can be
deciding factors. Canbank Factors Ltd. (a subsidiary of Canara Bank) offers "Export
Factoring" as a substitute for L/C. Details can be had from their website.
www.canbankfactors.com

ABOUT APEDA

The Agricultural and Processed Food Products Export Development Authority (APEDA) was established by the
Government of India under the Agricultural and Processed Food Products Export Development Authority Act
passed by the Parliament in December, 1985. The Act (2 of 1986) came into effect from 13th February, 1986
by a notification issued in the Gazette of India: Extraordinary: Part-II [Sec. 3(ii): 13.2.1986). The Authority
replaced the Processed Food Export Promotion Council (PFEPC).

1.1 ASSIGNED FUNCTIONS

In accordance with the Agricultural and Processed Food Products Export Development Authority Act, 1985,
(2 of 1986) the following functions have been assigned to the Authority.

Development of industries relating to the scheduled products for export by way of providing
financial assistance or otherwise for undertaking surveys and feasibility studies, participation in enquiry
capital through joint ventures and other reliefs and subsidy schemes;

Registration of persons as exporters of the scheduled products on payment of such fees as may be
prescribed;

Fixing of standards and specifications for the scheduled products for the purpose of exports;
Carrying out inspection of meat and meat products in slaughter houses, processing plants, storage
premises, conveyances or other places where such products are kept or handled for the purpose of ensuring
the quality of such products;

Improving of packaging of the Scheduled products;

Improving of marketing of the Scheduled products outside India;

Promotion of export oriented production and development of the Scheduled products;

Collection of statistics from the owners of factories or establishments engaged in the production,
processing, packaging, marketing or export of the scheduled products or from such other persons as may
be prescribed on any matter relating to the scheduled products and publication of the statistics so collected
or of any portions thereof or extracts therefrom;

Training in various aspects of the industries connected with the scheduled products;

Such other matters as may be prescribed.

1.2 PRODUCTS MONITORED

APEDA is mandated with the responsibility of export promotion and development of the following scheduled
products:

Fruits, Vegetables and their Products.

Meat and Meat Products.

Poultry and Poultry Products.

Dairy Products.

Confectionery, Biscuits and Bakery Products.

Honey, Jaggery and Sugar Products.

Cocoa and its products, chocolates of all kinds.

Alcoholic and Non-Alcoholic Beverages.

Cereal and Cereal Products.

Groundnuts, Peanuts and Walnuts.

Pickles, Papads and Chutneys.

Guar Gum.

Floriculture and Floriculture Products.

Herbal and Medicinal Plants.

In addition to this, APEDA has been entrusted with the responsibility to monitor import of sugar.

1.3 COMPOSITION OF THE APEDA AUTHORITY

As prescribed by the statute, the APEDA Authority consists of the following members namely:

A Chairman, appointed by the Central Government

The Agricultural Marketing Advisor to the Government of India, ex-offical.

One member appointed by the Central Government representing the Planning Commission

Three members of Parliament of whom two are elected by the House of People and one by the
Council of States

Eight members appointed by the Central Government representing respectively; the Ministries of
the Central Govt.
(i) Agriculture

and

Rural

Development

(ii) Commerce
(iii) Finance
(iv) Industry
(v) Food
(vi) Civil

Supplies

(vii) Civil

Aviation

(viii) Shipping and transport

Five members appointed by the Central Government by rotation in the alphabetical order to
represent the States and the Union Territories

Seven members appointed by the Central Govt. representing

(i) Indian

Council

of

(ii) National
(iii) National
(iv) Central

Agricultural

Horticultural
Agricultural
Food

(v) Indian
(vi) Spices

Board

Cooperative

Marketing

Technological
Institute

Export

Research

Research
of

Promotion

Federation
Institute
Packaging

Council

and

(vii) Cashew Export Promotion Council.

Twelve members appointed by the Central Government representing

Fruit and Vegetable Products Industries

Meat, Poultry and Dairy Products Industries

Other Scheduled Products Industries

Packaging Industry

Two members appointed by the Central Government from amongst specialists and scientists in the fields of
agriculture, economics and marketing of the scheduled products.