Factoring and forfaiting are two techniques used in trade finance to provide financing and mitigate risks associated with international trade. While both factoring and forfaiting involve the sale of trade receivables, there are several key differences between the two techniques:
- Type of Receivables: Factoring involves the sale of short-term trade receivables, such as invoices or accounts receivable, that are due within 90 days. Forfaiting, on the other hand, involves the sale of long-term trade receivables, such as promissory notes or bills of exchange, that are due after 90 days or more.
- Risk: Factoring transfers the risk of non-payment from the exporter to the factor, who assumes the credit risk. The factor may require the exporter to provide some form of credit insurance to mitigate the risk. Forfaiting, on the other hand, involves the transfer of both credit and political risks from the exporter to the forfaiter.
- Recourse: Factoring may be either recourse or non-recourse. In recourse factoring, the exporter remains liable for any unpaid receivables, while in non-recourse factoring, the factor assumes the risk of non-payment. Forfaiting, on the other hand, is always non-recourse. The forfaiter assumes all the risks associated with the receivables and has no recourse to the exporter.
- Financing: Factoring provides financing to the exporter in the form of a cash advance. The amount of financing is usually a percentage of the face value of the receivables. Forfaiting, on the other hand, provides financing to the importer in the form of a discounted purchase of the receivables.
- Tenor: Factoring provides short-term financing, typically for a period of up to 90 days. Forfaiting, on the other hand, provides long-term financing, typically for a period of more than 90 days.
- Customer Relationship: Factoring requires the exporter to maintain a relationship with the customer, as the factor collects payment directly from the customer. Forfaiting, on the other hand, does not require any direct relationship between the exporter and the importer.
In summary, factoring and forfaiting differ in terms of the type of receivables involved, the risks assumed, recourse, financing, tenor, and customer relationship. While both techniques provide benefits to exporters and importers, choosing the most appropriate option depends on the specific needs of the parties involved.