Factoring & Forfeiting Explained

Quick Reference

Trade receivables are amounts owed by customers for goods/services delivered on credit. Exporters can convert these into immediate cash through: factoring (sell invoices at discount), forfaiting (sell medium/long-term receivables without recourse), invoice discounting (borrow against invoices), ABL (asset-based lending), or banker’s acceptance (bank-guaranteed payment instrument).

Converting Trade Receivables into Cash

Trade receivables are recorded as current assets-they represent future cash flows from credit sales. Efficient receivable management is critical for cash flow, but waiting 30-90+ days for payment can strain working capital.

Options for Early Cash Conversion

Method	Best For	Recourse	Typical Advance
Factoring	Short-term receivables	With or without	70-90%
Forfaiting	Medium/long-term, large transactions	Without	Up to 100%
Invoice discounting	Companies retaining collection control	With	70-90%
Banker’s acceptance	International trade	Bank-guaranteed	Face value at maturity
Asset-based lending	Companies with strong receivables	Collateral-based	70-85%
Securitization	Large volumes of receivables	Varies	Varies

Exporters can convert trade receivables into immediate cash through multiple methods: factoring (sell invoices at discount, 70-90% advance), forfaiting (sell medium/long-term receivables without recourse, up to 100% advance), invoice discounting (borrow against invoices while retaining collection control), or asset-based lending (use receivables as collateral). The right choice depends on transaction size, maturity, and whether credit risk transfer is needed.

Financing Methods in Detail

Factoring

Factoring involves selling invoices to a third party (the factor) at a discount in exchange for immediate cash. The factor advances 70-90% of invoice value upfront and collects payment directly from customers.

How credit factoring works

Aspect	Recourse Factoring	Non-Recourse Factoring
Credit risk	Seller retains	Factor assumes
If customer doesn’t pay	Seller buys back invoice	Factor absorbs loss
Cost	Lower fees	Higher fees
Best for	Creditworthy customers	Uncertain payment risk

Pros	Cons
Immediate cash flow	Factor fees reduce margin
Outsourced collections	Factor interacts with your customers
Scales with sales volume	Can create dependence
Non-recourse transfers credit risk	Non-recourse is more expensive

Credit Forfaiting

Forfaiting is selling medium-to-long-term trade receivables to a forfaiter (bank or specialized institution) without recourse-the forfaiter assumes all credit, political, and currency risk. Common in international trade for capital goods and large-value transactions.

Credit Forfeiting (Trade Receivables)

Feature	Details
Recourse	Always non-recourse (forfaiter assumes all risk)
Instruments	Bills of exchange, promissory notes, sometimes LCs
Guarantee	Usually requires bank guarantee (aval)
Advance	Up to 100% of face value
Best for	Large international transactions, capital goods

Factoring vs. Forfaiting

Aspect	Factoring	Forfaiting
Receivables maturity	Short-term (30-90 days)	Medium/long-term (180 days to years)
Transaction size	Smaller, ordinary goods	Larger, capital goods
Advance	70-90%	Up to 100%
Recourse	With or without	Always without
Cost bearer	Exporter	Often importer
Secondary market	No	Yes (negotiable instruments)

Invoice Discounting

Invoice discounting allows businesses to borrow against outstanding invoices while retaining control of collections. Unlike factoring, customers don’t know the invoices are financed-the business continues to manage its own sales ledger.

Feature	Invoice Discounting	Factoring
Collection	Business collects	Factor collects
Customer awareness	Confidential	Customer knows
Control	Business retains ledger	Factor takes over
Advance	70-90%	70-90%

Best for: Businesses with strong credit control processes wanting confidential financing.

Banker’s Acceptance (BA)

A short-term debt instrument guaranteed by a commercial bank, commonly used in international trade. The bank promises to pay the holder a specified amount at a future date (typically within 6 months).

Feature	Details
Security	Bank-guaranteed payment
Liquidity	Can be sold on secondary market at discount
Maturity	Typically under 6 months
Use	International trade payments

Asset-Based Lending (ABL)

ABL uses trade receivables as collateral for a loan facility. Unlike factoring, the business retains control of collections and customer relationships.

Feature	Details
Borrowing base	70-85% of receivables value
Scaling	Credit line grows with sales
Control	Business retains customer relationships
Requirements	Regular reporting on receivables

Best for: Companies with strong receivables but limited traditional collateral.

Other Methods

Method	Description
Receivables securitization	Pool receivables into an SPV; issue securities to investors. Complex-suited for large organizations.
LC collateralization	Use confirmed Letter of Credit as security to obtain financing from own bank.

Export-Import Banks (Exim)

Exim Banks are government-backed agencies that support exporters with financing, insurance, and guarantees. They fill gaps where private banks won’t assume country or credit risk.

Exim Bank Services

Service	How It Helps
Export credit insurance	Protects against buyer non-payment (commercial or political reasons)
Working capital guarantees	Guarantees loans to finance export production
Factoring/forfaiting support	Facilitates receivable sales through partner institutions
Buyer financing	Direct loans to foreign buyers
LC confirmation	Adds bank guarantee to Letters of Credit

Exim Banks by Country

Region	Agencies
Americas	US Ex-Im Bank, Export Development Canada, Banco Nacional de Comercio Exterior (Mexico)
Europe	SACE (Italy), Euler Hermes (Germany), Coface (France), Atradius (Netherlands)
Asia	China Exim Bank, NEXI (Japan), EXIM India, K-sure (Korea)
Other	EFIC (Australia), SERV (Switzerland), Thai Exim

Pro Tip

Compare the “all-in” cost of factoring, not just the discount rate. Factors charge discount fees (1-5% of invoice value), service fees (0.5-2% monthly on outstanding), and sometimes setup fees. For high-volume, low-margin businesses like piping distribution, these fees can exceed profit margins - run the numbers before committing.

Common Mistake

Using recourse factoring and assuming credit risk is transferred. With recourse, if your customer doesn’t pay, you buy back the invoice plus fees. Non-recourse costs more but actually transfers the risk. Read the contract carefully - “recourse” terms vary significantly between factors.

Field Note

Before using forfaiting for export sales, verify the aval (bank guarantee) is from a bank the forfaiter accepts. An aval from a small regional bank in the buyer’s country may not be acceptable to major forfaiters, leaving you unable to monetize the receivable despite having documentation in place.