Factoring vs. Forfaiting: What's the Difference?
By Janet White || Published on February 8, 2024
Factoring involves a business selling its invoices to a third party to improve cash flow, while forfaiting is a financing technique where exporters sell their receivables to a forfaiter.
Key Differences
Factoring is a financial transaction where a business sells its accounts receivable (invoices) to a third party (a factor) at a discount. This provides the business with immediate cash flow. Forfaiting, on the other hand, is a financing technique used in international trade where exporters sell their receivables to a forfaiter, who assumes the risk of payment from the importer.
In factoring, the focus is on improving a company's immediate cash flow by selling short-term receivables. The factor typically assumes responsibility for managing and collecting the receivables. Conversely, forfaiting typically involves medium to long-term receivables in international trade, with the forfaiter taking on all the credit risk and the exporter receiving cash immediately.
Factoring can be with recourse or without recourse, meaning the business can be liable if the invoices are not paid. Forfaiting, however, is always without recourse, providing exporters a complete transfer of credit risk to the forfaiter.
The process of factoring is generally used by companies to manage working capital and liquidity, often involving ongoing relationships with the factor for multiple invoices or accounts receivable. Forfaiting, in contrast, is a transaction-based approach, commonly used for specific, larger transactions in international trade.
Factoring services include additional aspects like ledger management, collection services, and credit protection. Forfaiting, being more focused on international trade finance, deals primarily with the purchase of receivables and does not typically include these additional services.
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Comparison Chart
Purpose
Improves cash flow by selling short-term receivables.
Provides cash by selling medium to long-term international receivables.
Risk Assumption
Can be with or without recourse.
Always without recourse.
Type of Receivables
Involves short-term domestic invoices.
Deals with medium to long-term receivables, often in international trade.
Services Included
Includes ledger management, collection, and sometimes credit protection.
Focuses on purchasing receivables, usually without additional services.
Usage
Used for working capital management and liquidity.
Used for specific transactions, often in export financing.
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Factoring and Forfaiting Definitions
Factoring
Factoring involves a financial intermediary assuming the credit risk of accounts receivable for a fee.
To manage cash flow, the business engaged in factoring its receivables with a local bank.
Forfaiting
Forfaiting is the purchasing of an exporter's receivables at a discount by a financial intermediary.
The export company used forfaiting to eliminate credit risk and get immediate payment for its large overseas shipment.
Factoring
Factoring is the sale of a business's accounts receivable to a third party at a discount.
The company used factoring to quickly access cash from its outstanding invoices.
Forfaiting
Forfaiting involves an exporter selling their medium to long-term receivables to a forfaiter.
To secure immediate cash for a major international contract, the manufacturer opted for forfaiting.
Factoring
Factoring is a funding method where a business sells its invoices to a factor to expedite cash collection.
Facing a cash crunch, the small business turned to factoring its customer invoices.
Forfaiting
Forfaiting is a trade finance method where a forfaiter buys receivables from an exporter, bearing all credit risks.
Forfaiting provided the exporter a solution to mitigate credit risk in a politically unstable market.
Factoring
Factoring is a short-term financial strategy for converting receivables into immediate working capital.
The startup utilized factoring to maintain liquidity without waiting for invoice payments.
Forfaiting
Forfaiting is the sale of an exporter's receivables to a third party to mitigate credit risk and improve liquidity.
To streamline its finances, the company used forfaiting for its long-term receivables from international clients.
Factoring
Factoring is a transaction where a company sells its receivables to a factor to improve cash flow.
To finance its rapid expansion, the company opted for factoring instead of a traditional loan.
Forfaiting
Forfaiting is a financing technique where exporters sell their receivables to ensure cash flow without recourse.
The exporter chose forfaiting to avoid the hassle and risk of collecting payments from foreign buyers.
Factoring
One that actively contributes to an accomplishment, result, or process
"Surprise is the greatest factor in war" (Tom Clancy).
Factoring
One who acts for someone else; an agent.
FAQs
What is forfaiting?
Forfaiting is the sale of an exporter's receivables to a forfaiter to mitigate credit risk.
Is the seller liable in factoring?
It depends; with recourse factoring, yes, without recourse factoring, no.
What types of businesses use factoring?
Businesses of all sizes seeking to improve liquidity use factoring.
Are services like collection included in factoring?
Yes, factors often manage collections and ledger services.
What is factoring?
It's the sale of receivables by a business to a factor for immediate cash.
How does factoring help businesses?
It improves cash flow by providing immediate funds for outstanding invoices.
In what scenarios is forfaiting used?
Typically in international trade, to ensure payment for exported goods.
Who typically uses forfaiting?
Exporters who want to eliminate the risk of non-payment by international buyers.
Does the seller retain risk in forfaiting?
No, forfaiting transfers all credit risk to the forfaiter.
Can factoring be a long-term solution?
It's usually a short to medium-term cash flow solution.
How quickly can a business get funds through factoring?
Often within a few days of selling the receivables.
What impact does forfaiting have on a company's finances?
It provides cash and removes receivables and associated risks.
Is forfaiting a common practice in domestic trade?
No, it's primarily used in international trade contexts.
What are the key risks in forfaiting?
The main risk is borne by the forfaiter, primarily credit risk.
Can factoring improve a company's credit?
Indirectly, by improving cash flow and reducing late payments.
Is forfaiting suitable for short-term receivables?
No, it's better for medium to long-term receivables.
How does factoring affect a company's balance sheet?
It turns receivables into immediate liquid assets.
Does forfaiting include additional services?
No, it focuses solely on the purchase of receivables.
Are there different types of factoring?
Yes, including recourse, non-recourse, and maturity factoring.
How does forfaiting benefit exporters?
It provides immediate cash and removes the burden of collections.
About Author
Written by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
