Difference Wiki

Factoring vs. Forfaiting: What's the Difference?

Edited by Sawaira Riaz || By Sara Rehman || 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.
Sara Rehman
Feb 08, 2024
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.
Sara Rehman
Feb 08, 2024
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.
Sara Rehman
Feb 08, 2024
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.
Sara Rehman
Feb 08, 2024
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.
Harlon Moss
Feb 08, 2024
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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.
Sara Rehman
Feb 08, 2024

Risk Assumption

Can be with or without recourse.
Always without recourse.
Sawaira Riaz
Feb 08, 2024

Type of Receivables

Involves short-term domestic invoices.
Deals with medium to long-term receivables, often in international trade.
Sara Rehman
Feb 08, 2024

Services Included

Includes ledger management, collection, and sometimes credit protection.
Focuses on purchasing receivables, usually without additional services.
Harlon Moss
Feb 08, 2024

Usage

Used for working capital management and liquidity.
Used for specific transactions, often in export financing.
Aimie Carlson
Feb 08, 2024
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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.
Sara Rehman
Jan 24, 2024

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.
Sara Rehman
Jan 24, 2024

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.
Sara Rehman
Jan 24, 2024

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.
Sawaira Riaz
Jan 24, 2024

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.
Sara Rehman
Jan 24, 2024

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.
Aimie Carlson
Jan 24, 2024

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.
Sara Rehman
Jan 24, 2024

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.
Janet White
Jan 24, 2024

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.
Harlon Moss
Jan 24, 2024

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.
Sara Rehman
Jan 24, 2024

Factoring

One that actively contributes to an accomplishment, result, or process
"Surprise is the greatest factor in war" (Tom Clancy).
Sara Rehman
Jan 24, 2024

Factoring

One who acts for someone else; an agent.
Sara Rehman
Jan 24, 2024

FAQs

What is forfaiting?

Forfaiting is the sale of an exporter's receivables to a forfaiter to mitigate credit risk.
Sawaira Riaz
Feb 08, 2024

Is the seller liable in factoring?

It depends; with recourse factoring, yes, without recourse factoring, no.
Sara Rehman
Feb 08, 2024

What types of businesses use factoring?

Businesses of all sizes seeking to improve liquidity use factoring.
Sara Rehman
Feb 08, 2024

Are services like collection included in factoring?

Yes, factors often manage collections and ledger services.
Sara Rehman
Feb 08, 2024

What is factoring?

It's the sale of receivables by a business to a factor for immediate cash.
Sara Rehman
Feb 08, 2024

How does factoring help businesses?

It improves cash flow by providing immediate funds for outstanding invoices.
Sara Rehman
Feb 08, 2024

In what scenarios is forfaiting used?

Typically in international trade, to ensure payment for exported goods.
Janet White
Feb 08, 2024

Who typically uses forfaiting?

Exporters who want to eliminate the risk of non-payment by international buyers.
Harlon Moss
Feb 08, 2024

Does the seller retain risk in forfaiting?

No, forfaiting transfers all credit risk to the forfaiter.
Sara Rehman
Feb 08, 2024

Can factoring be a long-term solution?

It's usually a short to medium-term cash flow solution.
Janet White
Feb 08, 2024

How quickly can a business get funds through factoring?

Often within a few days of selling the receivables.
Janet White
Feb 08, 2024

What impact does forfaiting have on a company's finances?

It provides cash and removes receivables and associated risks.
Janet White
Feb 08, 2024

Is forfaiting a common practice in domestic trade?

No, it's primarily used in international trade contexts.
Sara Rehman
Feb 08, 2024

What are the key risks in forfaiting?

The main risk is borne by the forfaiter, primarily credit risk.
Sara Rehman
Feb 08, 2024

Can factoring improve a company's credit?

Indirectly, by improving cash flow and reducing late payments.
Janet White
Feb 08, 2024

Is forfaiting suitable for short-term receivables?

No, it's better for medium to long-term receivables.
Aimie Carlson
Feb 08, 2024

How does factoring affect a company's balance sheet?

It turns receivables into immediate liquid assets.
Aimie Carlson
Feb 08, 2024

Does forfaiting include additional services?

No, it focuses solely on the purchase of receivables.
Sara Rehman
Feb 08, 2024

Are there different types of factoring?

Yes, including recourse, non-recourse, and maturity factoring.
Sara Rehman
Feb 08, 2024

How does forfaiting benefit exporters?

It provides immediate cash and removes the burden of collections.
Harlon Moss
Feb 08, 2024
About Author
Written by
Sara Rehman
Sara Rehman is a seasoned writer and editor with extensive experience at Difference Wiki. Holding a Master's degree in Information Technology, she combines her academic prowess with her passion for writing to deliver insightful and well-researched content.
Edited by
Sawaira Riaz
Sawaira is a dedicated content editor at difference.wiki, where she meticulously refines articles to ensure clarity and accuracy. With a keen eye for detail, she upholds the site's commitment to delivering insightful and precise content.

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