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 shorttermed receivables (within 90 days) and is
more related to receivables against commodity sales.
Definition of Forfeiting
The terms forfeiting is originated from a old French word ‘forfait’, which means to
surrender ones right on something to someone else. In international trade, forfeiting may
be defined as the purchasing of an exporter’s receivables at a discount price by paying
cash. By buying these receivables, the forfeiter frees the exporter from credit and the risk
of not receiving the payment from the importer.
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.
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.
Documentary Requirements
In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be
reflected in the following documents associated with an export transaction in the manner
suggested below:
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.
Forfeiting
The forfeiting typically involves the following cost elements:
1. Commitment fee, payable by the exporter to the forfeiter ‘for latter’s’ commitment to
execute a specific forfeiting transaction at a firm discount rate with in a specified time.
2. Discount fee, interest payable by the exporter for the entire period of credit involved
and deducted by the forfaiter from the amount paid to the exporter against the availised
promissory notes or bills of exchange.
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.
Benefits to Banks
Forfeiting provides the banks following benefits:
Banks can offer a novel product range to clients, which enable the client to gain
100% finance, as against 8085% in case of other discounting products.
Bank gain fee based income.
Lower credit administration and credit follow up.
Definition of Factoring
Definition of 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.
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