Factoring Vs. Forfeiting: What’s the Difference?

factoring and forfaiting

Factoring and forfaiting differ in nature, scope, and concept. Factoring pertains to the selling of a firm’s accounts receivables to a third party (a factoring company or a lender) at a discounted price. In forfeiting, exporters relinquish their rights to the forfaiter in exchange for immediate cash.

The Definition of Factoring and Forfaiting

Factoring

Factoring – also known as invoice factoring or accounts receivable financing – is the process in which businesses receive advances against their accounts receivables. There are three parties when it comes to factoring: the debtor (buyer of goods), the client (seller of the goods), and the factor (the financier). This type of financing is often utilized to manage book debt.

Forfaiting

Forfaiting is a financing option exporters use to receive immediate cash. How it works: The exporter sells its claim on medium and long-term trade receivables to a forfaiter at a discounted rate to receive fast access to cash. The benefit: Exporters minimize the risk of factoring by selling without recourse, which means the exporter is not liable when the importer fails to pay the receivables.

Key Differences Between Factoring and Forfaiting

The main difference between the two is that factoring can be used in domestic and international trade, whereas forfaiting only applies to international trade financing.

Here are eight additional key differences between factoring and forfaiting:

1. THE PROCESS

Factoring: A financial arrangement where business owners sell their pending invoices (accounts receivables) to a third party (factoring companies, lenders, or banks) in exchange for fast cash.

Forfaiting: Belongs under export financing in which an exporter sells their rights of trade receivables to a forfaiter to acquire immediate cash payment.

2. TIMING

Factoring: Deals with short-term accounts receivables, which typically falls due within 90 days or less.

Forfaiting: Deals with medium- to long-term accounts receivables.

 3. SALE OF RECEIVABLES

Factoring: The sale of receivables are usually on ordinary products or services.

Forfaiting: The sales of receivables are on capital goods.

4. PERCENTAGE OF FINANCING RECEIVED

Factoring: Business owners usually get 80% to 90% financing.

Forfaiting: Funds exporters with 100% financing of the value of exported goods.

5. NEGOTIABLE INSTRUMENTS

Factoring: Deals with negotiable instruments, such as promissory notes and bills of exchanges.

Forfaiting: Does not deal with negotiable instruments.

6. RECOURSE VS. NON-RECOURSE

Factoring: It can be recourse or non-recourse.

Forfaiting: Always non-recourse.

7.  SECONDARY MARKETS

Factoring: No secondary market.

Forfaiting: There is a secondary market that increases the liquidity in forfaiting.

 8. WHO PAYS FOR THE COST

Factoring: The seller or client pays for the factoring costs.

Forfaiting: The overseas buyer pays for the forfeiting costs.

 

Factoring and forfeiting tends to be complex and can be difficult to understand. If you have any questions or if you’re interested in learning more about factoring and forfeiting, Let the experts at SMB Compass help. Our friendly, knowledgeable team of finance specialists are one call away!

Remember, time is money and money is time.

Give us some of you time, and we’ll help you get the money!

You can reach us NOW via phone at (888) 853-8922 or via email at [email protected].

Ezra Cabrera
Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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