Factoring and forfeiting: similarities and differences
Modern business rules force market participants to try new approaches and show flexibility. In order to increase sales and retain customers, it is often necessary to make concessions – to delay payment. It happens that between delivery of the goods to the buyer and its payment takes about 30-40 days. This period depends on product liquidity, agreements in the process of cooperation. This option of calculation can be considered a commercial loan. Factoring and forfeiting are convenient tools for buyers. They give an opportunity not to take money from the total turnover to make an advance. These schemes allow planning in advance when the accounts receivable will be repaid. It is important that this option of cooperation reduces the risk for the client.
Despite the positive aspects for the buyer, the use of factoring or forfeiting is not always profitable for the supplier. The loan may cause gaps in cash processes, reduce financial stability and reduce working capital. But if you cooperate through an export or import transaction, factoring eliminates the need to take proceeds from a foreign partner. This significantly simplifies the life of the supplier, reducing the volume of additional work, as is the case with deferred payment transactions.
The factor in most cases is a banking institution or factoring firm. The credit is the seller and the debtor is the buyer. It is also possible to involve a third party, an intermediary, who provides services for the implementation of the factoring procedure in electronic form.
Forfeiting has several differences. There are also processes related to receivables, but in the case of forfeiting, the bank buys and sells promissory notes for an amount equal to the transaction value. In this case, the institution assumes commercial risks.
Forfeiting has advantages primarily for the exporter. Transactions carried out in this way are designed for a long time. When carrying out factoring operations, the term of the agreement is not more than 180 days. Forfeiting allows you to conclude contracts even for 10 years, and this is rare, but common. Postponement presupposes registration of a debt receipt from the buyer, and is made in the form of a bill of exchange. It is an insurance policy for the supplier that the payment will be repaid at the end of the transaction. Forfeiter is interested in a discount, the size of which is affected by the nominal amount of the debt obligation. Besides, it depends on the market peculiarities.
If we compare these instruments, then in factoring the loan amount regulates the factor, and in case of forfeiting syndication is used, which allows increasing the transaction amount. The factor must pay an advance payment of 70-90% of the total amount, and the forfeiter repays everything except the discount value.
In factoring it is not necessary to involve a third party as a guarantor of payment, and for forfeiting it is necessary.