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Compare difference between factoring and forfeiting
LOGO Factoring & forfeiting Hanoi university-FMTTut 1 FB08 Contents 1. Factoring 2. Forfeiting 3. Factoring vs. Forfeiting I. Factoring 1. Definition o A “continuing arrangement” between a financial institution (the factor) and a business concern (the client) selling goods or services to trade customers (the customer) whereby the factor purchases the client’s accounts receivables/book debts o Simple definition: it is the conversion of credit sales into cash www.themegallery.comCompany Name I. Factoring (cont.) 2. Process of international factoring 3. Set up relationship Exporter Importer Import factor Export factor 4. Collect money from Importer 1. Ship goods 2. Sell account receivables 5. Give money 6. Pay money I. Factoring (cont.) 3. Advantages to exporter Being provided with commercial credit increase competitive & export ability Risk of non-payment is reduced because of import factor Increase the liquidity Reduce the bad debts on the balance sheet Reduce the cost of book keeping & debt collection Language & local law problems are dealt by factors I. Factoring (cont.) 4. Advantages to importer Pay invoices in the country locally, deals with the local agency, i.e. the Import Factor Minimum documentation required The cost of Letters of Credit and delay on account of LC’s are eliminated. All communication is in his own language Being advised about other related services by factors II. Forfeiting 1. Definition Export fixed interest trade financing Purchasing of obligations falling due at some future date Without recourse Up to 100% financing II. FORFAITING (cont.) PROCESS II. FORFAITING (cont.) 3. Advantages & Disadvantages to exporter Advantages: - 100% financing - Improved cash flow - Reduced administration costs - Risk reduction - Increased trade opportunity Disadvantages: - High fee charged II. FORFAITING 4. Advantages & Disadvantages to importer Advantages: - Can obtain 100% financing - Can enjoy medium & long term financing with less cost - Fixed rate interest easy to make budgeting - Avoid credit limit by banks Disadvantages: - Fee for availing bank - High fee and discounting interest put up the price of good [...]...III Factoring Vs Forfeiting Criteria Extent of Finance Credit Worthiness Recourse Factoring - About 80% of the invoice value Forfeiting - 100% of the value of the invoice -The Factor does the credit rating in case of without recourse - The Forfeiter relies on the creditability of the availing bank - With or without recourse - Always without recourse LOGO III Factoring Vs Forfeiting (cont.)... recourse - The Forfeiter relies on the creditability of the availing bank - With or without recourse - Always without recourse LOGO III Factoring Vs Forfeiting (cont.) Criteria Services provided Factoring Forfeiting - Day to day - No service provided administration of sales and other allied services - Short term - Medium and long term - Separate charges applied for + Financing, + Collection, + Administration, . LOGO Factoring & forfeiting Hanoi university-FMTTut 1 FB08 Contents 1. Factoring 2. Forfeiting 3. Factoring vs. Forfeiting I. Factoring 1 discounting interest put up the price of good LOGO III. Factoring Vs Forfeiting Criteria Factoring Forfeiting Extent of Finance - About 80% of the invoice