FACTORING
The arrangement in which short term domestic receivables on sale of goods or services are sold to an agency (known as a factor),
is called the factoring. Presently two bank backed factoring companies i.e. SBI Factors and Canara Bank Factors are engaged in
business of factoring, in association with SIDBI.
2 It has been introduced in India during 1991 on the Report of Kalyanasundrama Committee.
3 The factor performs the functions such as purchase of receivables, maintaining the sales or receivables ledgers, submitting sales
account to the creditors, collection of debt on due dates, after collection, to return the reserve money to the seller and
provide consultancy services to the customer in respect of marketing, finance and production.
4 The advantages of factoring are:
a: All the sales practically become cash sales to the seller
b: Money blocked with sundry debtors becomes available for business.
c: The seller also gets rid of collection of the receivables
d: His working capital management becomes efficient which also reduce his cost and in turn improve the possibility of better
profits.
Process of Factoring
The seller of goods sells on credit basis to a reputed buyer and gets the invoices accepted for payment from the buyer.
These invoices are then assigned to a financial institution called factor, which discounts these invoices and makes payment to the
seller of goods.
On due date, the factor recovers the payment from the buyer of the goods.
In case of non payment, the loss is borne by the factor in case of without recourse factoring
FORFAITING
Forfaiting represents the purchase of obligations, which fall due at some future date and arise from delivery of goods (or
services) in export transactions, without recourse to the previous holder of the obligation.
Under forfaiting, the forfeiter deducts interest in advance for the whole period of credit and disburses the net proceeds to the
exporter. The sole responsibilities of the exporter is to manufacture and deliver the goods to the importer, which creates a valid
payment obligation of the importer.
The forfaiting originated when trade between Western and Eastern Europe was re-established during the early 6os. The growing
importance of trade with developing countries in Africa, Asia and Latin America boosted the forfaiting market to an international
level.
Forfaiting and Factoring : Factoring is suitable for financing smaller and short term receivables with credit period between go to
iBo days, whereas forfaiting is used to finance capital goods' exports with credit terms between a few months to io years.
Factoring covers the commercial risk, whereas forfaiting additionally covers the political and transfer risk.
Process of forfaiting:
The exporter approaches the forfaitor, willing to undertake forfaiting.
The transaction covers the export, the price of which is receivable over a medium term and it is covered by a bank guarantee
or aval.
The forfaitor stipulates an expiry date during which the exporter will make the shipment, prepare the documents and present
the documents.
The exporter gets payment immediately on presentation of documents.
The forfaitor recovers the interest for the money, the charges for political, commercial and country risk and other incidental
costs.
The importer becomes liable for the cost of contract and receives the credit from forfaitor for a given no. of years, at a given
interest rate.
The importer's obligation is guaranteed by a bank guarantee or aval.
Security for forfaiting: The drafts (in the form of promissory notes or accepted bills of exchange) covering the transaction, are
guaranteed by a bank aval (co-acceptance of bills of exchange or of promissory notes by the bank) or a bank guarantee (as a
separate guarantee bond), promising to pay the amount on the given date, in the event of non-payment by the original debtor
(i.e. importer). The guarantor is usually an internationally active bank, resident in the importer's country which can ascertain
the importer's creditworthiness first-hand.
The arrangement in which short term domestic receivables on sale of goods or services are sold to an agency (known as a factor),
is called the factoring. Presently two bank backed factoring companies i.e. SBI Factors and Canara Bank Factors are engaged in
business of factoring, in association with SIDBI.
2 It has been introduced in India during 1991 on the Report of Kalyanasundrama Committee.
3 The factor performs the functions such as purchase of receivables, maintaining the sales or receivables ledgers, submitting sales
account to the creditors, collection of debt on due dates, after collection, to return the reserve money to the seller and
provide consultancy services to the customer in respect of marketing, finance and production.
4 The advantages of factoring are:
a: All the sales practically become cash sales to the seller
b: Money blocked with sundry debtors becomes available for business.
c: The seller also gets rid of collection of the receivables
d: His working capital management becomes efficient which also reduce his cost and in turn improve the possibility of better
profits.
Process of Factoring
The seller of goods sells on credit basis to a reputed buyer and gets the invoices accepted for payment from the buyer.
These invoices are then assigned to a financial institution called factor, which discounts these invoices and makes payment to the
seller of goods.
On due date, the factor recovers the payment from the buyer of the goods.
In case of non payment, the loss is borne by the factor in case of without recourse factoring
FORFAITING
Forfaiting represents the purchase of obligations, which fall due at some future date and arise from delivery of goods (or
services) in export transactions, without recourse to the previous holder of the obligation.
Under forfaiting, the forfeiter deducts interest in advance for the whole period of credit and disburses the net proceeds to the
exporter. The sole responsibilities of the exporter is to manufacture and deliver the goods to the importer, which creates a valid
payment obligation of the importer.
The forfaiting originated when trade between Western and Eastern Europe was re-established during the early 6os. The growing
importance of trade with developing countries in Africa, Asia and Latin America boosted the forfaiting market to an international
level.
Forfaiting and Factoring : Factoring is suitable for financing smaller and short term receivables with credit period between go to
iBo days, whereas forfaiting is used to finance capital goods' exports with credit terms between a few months to io years.
Factoring covers the commercial risk, whereas forfaiting additionally covers the political and transfer risk.
Process of forfaiting:
The exporter approaches the forfaitor, willing to undertake forfaiting.
The transaction covers the export, the price of which is receivable over a medium term and it is covered by a bank guarantee
or aval.
The forfaitor stipulates an expiry date during which the exporter will make the shipment, prepare the documents and present
the documents.
The exporter gets payment immediately on presentation of documents.
The forfaitor recovers the interest for the money, the charges for political, commercial and country risk and other incidental
costs.
The importer becomes liable for the cost of contract and receives the credit from forfaitor for a given no. of years, at a given
interest rate.
The importer's obligation is guaranteed by a bank guarantee or aval.
Security for forfaiting: The drafts (in the form of promissory notes or accepted bills of exchange) covering the transaction, are
guaranteed by a bank aval (co-acceptance of bills of exchange or of promissory notes by the bank) or a bank guarantee (as a
separate guarantee bond), promising to pay the amount on the given date, in the event of non-payment by the original debtor
(i.e. importer). The guarantor is usually an internationally active bank, resident in the importer's country which can ascertain
the importer's creditworthiness first-hand.
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