Factoring / Forfeiting



One of the oldest forms of business financing, factoring is the cash-management tool of choice for many companies. Factoring is very common in certain industries, such as the clothing industry, where long receivables are part of the business cycle.

In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service and generates an invoice. The factor (the funding source) buys the right to collect on that invoice by agreeing to pay you the invoice's face value less a discount--typically 2 to 6 percent. The factor pays 75 percent to 80 percent of the face value immediately and forwards the remainder (less the discount) when your customer pays.

Because factors extend credit not to their clients but to their clients' customers, they are more concerned about the customers' ability to pay than the client's financial status. That means a company with creditworthy customers may be able to factor even if it can't qualify for a loan.
Once used mostly by large corporations, factoring is becoming more widespread. Still, plenty of misperceptions about factoring remain.

Factoring is not a loan; it does not create a liability on the balance sheet or encumber assets. It is the sale of an asset--in this case, the invoice. And while factoring is considered one of the most expensive forms of financing, that's not always true. Yes, when you compare the discount rate factors charge against the interest rate banks charge, factoring costs more. But if you can't qualify for a loan, it doesn't matter what the interest rate is. Factors also provide services banks do not: They typically take over a significant portion of the accounting work for their clients, help with credit checks, and generate financial reports to let you know where you stand.

The idea that factoring is a last-ditch effort by companies about to go under is another misperception. Walt Plant, regional manager with Altres Financial, a national factoring firm based in Salt Lake City, says the opposite is true: "Most of the businesses we deal with are very much in an upward cycle, going through extremely rapid growth." Plant says you may be a candidate for factoring if your company regularly generates commercial invoices and you could benefit from reducing the time receivables are outstanding. Factoring may provide the cash you need to fund growth or to take advantage of early-payment discounts suppliers offer.

Factoring is a short-term solution; most companies factor for two years or less. Plant says the factor's role is to help clients make the transition to traditional financing. Factors are listed in the telephone directory and often advertise in industry trade publications. Your banker may be able to refer you to a factor. Shop around for someone who understands your industry, can customize a service package for you, and has the financial resources you need.

The financing provided by a "Factor" is flexible and linked directly to the client's sales. Finance is made available upto 95% of the invoice value.

Credit Protection
"Factor" provides credit protection against payment default of buyer. In the event of a claim on account of default, the payment to the seller is simple without any elaborate procedures. This is in case of "Non Recourse" Factoring.

Collection Service
"Factor" assumes responsibility for collection of receivables under the factoring agreement. SBIGFL has systems in place for tracking receivables on an invoice to invoice basis and has an effective correspondent network in more than 80 countries for follow up of receivables.

Professional Sales Ledger Management & Analysis
Factor manages for its clients the complete sales ledger. Few Factoring Companies have now provided web access to its clients for accessing their accounts online. BIGFL is the first factoring company in India to provide online access to its clients.

  All Figures in Euro Billion
Country 2012 2013 Growth Rate
Europe 1298 1354 4.3%
Asia 572 599 4.7%
Americas 188 192 2.1%
Africa 23 23 0.0%
Other 50 62 24.0%
Total 2131 2230 4.6%



Forfaiting evolved in the 1960s and was originally used to finance exports from countries in Western Europe to East European countries. With the growth in global trade, the product is now widely used to finance trade with all geographic areas, and has also been extended from its traditional role of post-shipment finance to provide pre-export finance, structured trade finance, project finance and even working capital.

In order to remain competitive, exporters are often faced with having to allow their importing partners longer period of payment. Such difficulties expose the exporter to a number of risks which can assume substantial proportions, depending on the country of the importer and the period allowed for payment. On top of typical commercial risks, such as insolvency of the importer, unwillingness or inability to pay, exporters have to consider the difficulties in appraising the monetary, economic and political risks inherent in the importer's country. The requirements placed on the financial institutions by exporters seeking solutions to the ever-growing complexities of international financing have led to an increased demand for Forfaiting.

The term "a forfait" in French means, "relinquish a right". Here, it refers to the exporter relinquishing his right to a receivable due at a future date in exchange for immediate cash payment, at an agreed discount, passing all risks and responsibilities for collecting the debt to the forfaiter.

Forfaiting as an export financing option in India has been approved by the Reserve Bank of India vide its circular A.D. (G.P. Series) No. 3 dated February 13, 1992. The Forfaiting facility is to be provided by an international forfaiting agency through an Authorised Dealer (see RBI Circular No. 42 A. D. (M.A.) series dated October 27, 1997).

Forfaiting proceeds, on a without recourse basis, are to be received in India as soon as possible after shipment but definitely within the 180 day period specified by RBI for all exports. A Forfaiting transaction is to be routed through an Authorised Dealer, who apart from handling documentation will also provide Customs Certification for GR Form purposes.

Elimination of the following Risks associated with cross border transactions.

Commercial Risk - The risk of non-payment by a non-sovereign or private sector buyer or borrower in his home currency arising from insolvency.
Political Risk - The risk of the borrower country government actions, which prevent or delay the repayment of export credits.
Transfer Risk - The risk of an inability to convert local currency into the currency in which debt is denominated.
Interest Risk - The risk of interest rate fluctuations during the credit period of the transaction.
Exchange Risk - The risk of exchange rate fluctuations.