Factoring , Forfeiting & Bills Discounting

 Factoring　: A　factor, i.e. a commercial bank or a specialized financial firm, can assist an exporter with financing through the purchase of invoices or accounts receivable. Export factoring is offered under an agreement between the factor and the exporter, in which the factor purchases the exporter’s short-term foreign accounts receivable for cash at a discount from the face value, normally without recourse, and assumes the risk on the ability of the foreign buyer to pay, and handles collections on the receivables. Thus, by virtually eliminating the risk of nonpayment by foreign buyers, factoring allows the exporter to offer open accounts, improves liquidity position, and boosts competitiveness in the global marketplace.

Forfeiting: A　forfaiter　is a specialized finance firm or a department in banks offers non-recourse export financing through the purchase of medium-term trade receivables. Similar to factoring, forfaiting virtually eliminates the risk of nonpayment, once the goods have been delivered to the foreign buyer in accordance with the terms of sale. However, unlike factors, forfaiters typically work with the exporter who sells capital goods, commodities, or large projects and needs to offer periods of credit from 180 days to up to seven years.

Bills Discounting:　Business activities across borders are done through letter of credit. Letter of credit is an instrument issued in the favor of the seller by the buyer bank assuring that payment will be made after certain timer frame depending upon the terms and conditions agreed, it could be either sight, 30 days from the Bill of Lading or 120 days from the date of bill of lading. Now when the seller receives the letter of credit through bank, seller prepares documents and presents the same to the bank.

The most important element in the same is the bill of exchange which is used to negotiate a letter of credit. Seller discounts that bill of exchange with the bank and gets money. Discounting bill terminology is used for this purpose. Now it is seller's bank responsibility to send documents and bill of exchange to buyer's bank for onward forwarding to the buyer for the acceptance and the buyer finally, accepts bill of exchange drawn by the seller on buyer's bank because he has opened that LC. Buyers bank than get that signed bill of exchange from the buyer as guarantee and release payment to the sellers bank and waits for the time span will buyer will pay the bank against that bill of exchange.


Difference between Factoring & Forfeiting
In forfaiting, receivables are normally guaranteed by the importer’s bank, allowing the exporter to take the transaction off the balance sheet to enhance its key financial ratios. Forfeiting typically requires a bank guarantee for the foreign buyer. It allows opening an account in markets with relatively high credit risk. It is can be more expensive than commercial bank financing.

Difference between Factoring & Bills Discounting


Similarities:
Factoring is somewhat similar to bills discounting in the sense that both these services provide short term finance. Again discount account receivables which the client would have otherwise received from the buyer at the end of the credit period.


Differences:
Nonetheless, the two receivables financing arrangements differ in important respects.
Bill discounting is always with recourse whereas factoring can be either with recourse or without recourse.
In bill discounting the drawer undertakes the responsibility of collecting the bills and remitting the proceeds to the financing agency, while the factor usually undertakes to collect the bills of the client.
Bills discounting facility implies provision of finance and only that, but a factor also provides other services like sales ledger maintenance and advisory services.
Discounted bills may be rediscounted several times before they mature for payment. Debts purchased for factoring cannot be rediscounted, they can only be refinanced.
Factoring implies the provision of bulk finance against several unpaid trade generated invoices in batches; bill financing is individual transaction oriented i.e. each bill is separately assessed and discounted.
Factoring is an off balance mode of financing
Bills discounting does to involve assignment of debt as is the case with factorin