This document discusses factoring and forfeiting as methods of providing financing to exporters and importers. It defines factoring as converting credit sales into cash by having a financial institution purchase a company's accounts receivable. Forfeiting involves an exporter relinquishing the right to receive payment from an importer in exchange for an upfront cash payment from a forfeiting institution. The document outlines the key characteristics, types, facilities, and documentary requirements of factoring and forfeiting transactions to provide international trade financing options to companies.

1. VARIOUS FACILITIES TO EXPORTS
AND IMPORTS INCLUDING
FACTORING AND FORFEITING
BY-
Shaifali Bhatia
Madhur Arora
Prince Goel
Yajur Tyagi

2. INTRODUCTION
• Forfeiting and factoring are services in international market
given to an exporter or seller.
• Its main objective is to provide smooth cash flow to the
sellers.
• The basic difference between the forfeiting and factoring is
that forfeiting is a long term receivables (over 90 days up to
5 years) while factoring is a short termed receivables (within
90 days) and is more related to receivables against
commodity sales.

3. FACTORING
• To define, factoring is very simple and can be defined as the
conversion of credit sales into cash.
• Here, a financial institution which is usually a bank buys the
accounts receivable of a company usually a client and then pays
up to 80% of the amount immediately on agreement.
• The remaining amount is paid to the client when the customer
pays the debt
• Examples includes factoring against goods purchased, factoring
against medical insurance, factoring for construction services etc

4. Characteristics of Factoring
1. The normal period of factoring is 90150 days and rarely exceeds
more than 150 days.
2. It is costly.
3. Factoring is not possible in case of bad debts.
4. Credit rating is not mandatory.
5. It is a method of off balance sheet financing.
6. Cost of factoring is always equal to finance cost plus operating cost.

5. Different Types of Factoring
• Disclosed Factoring: In disclosed factoring, client’s customers
are aware of the factoring agreement. Disclosed factoring is of
two types:
• Recourse factoring: The client collects the money from the
customer but in case customer don’t pay the amount on
maturity then the client is responsible to pay the amount to the
factor. It is offered at a low rate of interest and is in very
common use.

6. • Nonrecourse factoring: In nonrecourse factoring, factor
undertakes to collect the debts from the customer. Balance
amount is paid to client at the end of the credit period or
when the customer pays the factor whichever comes first.
The advantage of nonrecourse factoring is that continuous
factoring will eliminate the need for credit and collection
departments in the organization
• In Undisclosed factoring, client's customers are not notified
of the factoring arrangement. In this case, Client has to pay
the amount to the factor irrespective of whether customer has
paid or not.

7. Facilities of factoring
• Immediate cash flow/liquidity:
Under the factoring arrangement, the factor pays up to 80%
(in some cases even 90%) of receivables within one-two
working day of presentation of the invoice. This
substantially reduces the average receivable days, leading to
improved liquidity and efficient working capital
management.
• No need for collateral:
Many banks require collateral from small businesses.
However, most factoring companies don’t need collateral as
the receivables, and the buyers are duly audited and the
financial institution assumes the risk.

8. • Focus on core activities:
Factoring saves time and the cost of collecting customers’ receivables.
This makes it a good solution for small businesses. The factor provides
all services related to sales ledger management, collection of account
receivables, credit control and protection, etc., enabling the company to
concentrate on its core competencies more efficiently.
• A sale, not a loan:
Factoring isn’t a loan and doesn’t create any liability on the balance
sheet. This is in stark contrast to a bill discounting service where the
discounted bills are simply used as collateral against the loans.

9. Advisory services:
• Factors need to recover dues from buyers in several other countries that
their exporters regularly ship. So, they are generally aware of the
potential risks of dealing with a buyer or a specific region.
• In several cases, a factor offers various advisory services to its clients,
including credit assessment for overseas buyers. This helps the
exporter to learn more about the customer and to negotiate better terms
and conditions for the business. In cases where the factor rejects the
application due to a poor record or risky importer, the factor will keep
the exporter informed about the dangerous trade.
• This helps the exporter avoid such transactions and engage only with
verified and legitimate buyers. Some factors also have experts on their
team who advise exporters on the finer technical aspects of a client’s
business.

10. Protection from bad debts:
If a client chooses non-recourse factoring, the factor assumes
the risk of bad debts. So, the exporter can focus on growing
the business with the unlocked capital instead of worrying
about getting paid. However, in non-recourse factoring, the
cost competitiveness aspect of the financing mechanism is
slightly compromise

11. Cost competitive:
• Since factoring is a very competitive industry, costs are
usually reasonable, making it a cost-effective way of
managing the sales ledger functions. This is especially the
case with recourse-based factoring.
• As mentioned earlier, Non-recourse financing options can be
slightly more expensive. However, for the exporter, the risk
associated with the transaction is also commensurate with
the cost.

12. Easy and Fast
• It is widely considered one of the most significant merits of
factoring. Exporters with scalable, growing, and profitable
business ventures generally need working capital quickly and not
necessarily at a lower cost.
• Business exigencies require a growing export company to be
quick and agile. This is possible only with fast financing as
traditional bank loans have painfully long procurement channels.
Moreover, the application required to establish a factoring
relationship is much simpler than other types of financing

13. FORFEITING
• Forfaiting is originally a French word, meaning to relinquish a
right.
• Forfaiting is the provision of medium-term financial support for
the import and export of capital goods.
• Major sources of export financing are working capital financing,
countertrade, factoring, and forfaiting.
• Forfaiting is a mechanism where the exporter surrenders his
rights to receive payment against the goods and services rendered
to the importer, in exchange for a cash payment from the forfeiter

14. Characteristics of a Forfaiting
Transaction
The common characteristics of a forfaiting transaction could
be:
• The minimum bill size is either $250,000 or $500,000
• The length of credit extended to the importer ranges from
six months to seven years
• It is receivable in any major convertible currency, e.g.,
USD, CAD, EUR, etc.
• A contract for goods and services
• A written letter of credit or a guarantee is made by a bank,
usually in the importer’s country

15. THE FORFAITER REQUIRES THE
FOLLOWING INFORMATION TO
PARTICIPATE IN THE TRANSACTION:
• The identity of the buyer
• Buyer’s nationality
• Nature of goods sold
• Detail of the value
• Currency of contract
• Date and duration of the contract
• Credit terms
• Payment schedule
• Interest rate
• Know what evidence of debt will be used, e.g., promissory
notes, bills of exchange, letter of credit, etc.
• The identity of the guarantor of payment

16. HOW FORFEITING WORKS IN
INTERNATIONAL TRADE?
• The exporter and importer negotiate according to the proposed
export sales contract.
• Then the exporter approaches the forfeiter to ascertain the terms of
forfeiting.
• After collecting the details about the importer, and other necessary
documents, forfeiter estimates risk involved in it and then quotes the
discount rate.

17. • The exporter then quotes a contract price to the overseas buyer by
loading the discount rate and commitment fee on the sales price of the
goods to be exported and sign a contract with the forfeiter.
• Export takes place against documents guaranteed by the importer’s
bank and discounts the bill with the forfeiter and presents the same to
the importer for payment on due date.

18. Benefits to Exporter
• 100 per cent financing : Without recourse and not occupying exporter's
credit line That is to say once the exporter obtains the financed fund, he
will be exempted from the responsibility to repay the debt.
• Improved cash flow : Receivables become current cash in flow and its is
beneficial to the exporters to improve financial status and liquidation
ability so as to heighten further the funds raising capability.
• Reduced administration cost : By using forfeiting , the exporter will
spare from the management of the receivables. The relative costs, as a
result, are reduced greatly.
• Advance tax refund: Through forfeiting the exporter can make the
verification of export and get tax refund in advance just after financing.
• Risk reduction : forfeiting business enables the exporter to transfer
various risk resulted from deferred payments, such as interest rate risk,
currency risk, credit risk, and political risk to the forfeiting bank.
• Increased trade opportunity : With forfeiting, the export is able to grant
credit to his buyers freely, and thus, be more competitive in the market

19. DOCUMENTARY REQUIREMENTS
• Invoice : Forfeiting discount, commitment fees, etc. needs not be
shown separately instead, these could be built into the FOB price,
stated on the invoice.
• Shipping Bill and GR form : Details of the forfeiting costs are to be
included along with the other details, such FOB price, commission
insurance, normally included in the "Analysis of Export Value "on the
shipping bill. The claim for duty drawback, if any is to be certified only
with reference to the FOB value of the exports stated on the shipping
bill.

20. THANK YOU