Difference between Forfaiting and Factoring
Basis |
Forfaiting |
Factoring |
---|---|---|
Definition | Forfaiting is defined as a term where the exporter of the products or services sells its accounts receivables to a third party at a discount in order to immediately receive the cash payment. | Factoring is defined as a mechanism where businesses sell the receivables of their accounts to a third party and in exchange receive an immediate advance on the amount. |
Goods | Goods involved in forfaiting are majorly capital goods such as machinery and other equipment. | Goods involved in factoring are mostly consumer goods and services. |
Type of Trade | Forfaiting mainly includes international trade. | Factoring mainly includes domestic trade. |
Risk | In forfaiting, the third party has to deal with all the risk. | In factoring, the seller has to deal with risk. |
Recourse | Forfaiting is always without recourse. | Factoring can be done with or without recourse |
Time period | Forfaiting is used for long-term and medium-term account receivables therefore credit period is of 3 months to 7 years. | Factoring is used for short-term account receivables therefore credit period is of 90 to 150 days. |
Cost | In forfaiting, the third party has to bear the cost. | In factoring, the seller has to bear the cost. |
Secondary Market | In the forfaiting process, the receivables can be sold in the secondary market. | In the factoring process, there is no involvement with the secondary market. |
Negotiable instrument | In Forfaiting, the third party has the right to hold negotiable instruments such as treasury bills and promissory notes till the maturity period ends. | In the process of factoring, no negotiable instruments are held by any of the involved parties. |
Financing | 100% finance can be provided in forfaiting. | 80% to 90% of finance can be provided in factoring. |
Difference between Forfaiting and Factoring
Forfaiting and Factoring are often used synonymously by a layman, but there are differences between the two. Forfaiting is an international finance mechanism where an exporter sells its accounts receivables to a third party, whereas in factoring a business sells the receivables of accounts to a third party and in exchange receives an immediate advance on the amount.