Difference between Factoring and Forfaiting

Both the services ‘factoring’ and ‘forfeiting’ are providing finance to the seller. Their main objective is to provide smooth cash flow to the sellers. The basic difference between the forfeiting and factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is short term receivables (within 90 days) and is more related to receivables against commodity sales. Let us see the other differences between factoring and forfeiting:-

The Growth of forfeiting Business

With the increased volume of trade between the developed and developing countries, exporters in developed countries were in search of some alternative mode of trade finance as the buyers of the developing countries required credit that could not be offered through the traditional means of finance. Forfeiting originated in West Germany and Switzerland in 1960 and extended to all countries later. London soon became the most vibrant market. Some of the international operators are Chase Manhattan, Citibank and Security Pacific.

The Problem Areas in forfeiting services

The absence of legal framework for settling disputes between exporter, importer and forfeiter are major hindrances to these services. Lack of an accurate database on importers and their status in their countries is another problem. The risks-commercial, political and sovereign may sometimes be high. Absence of developed secondary market may also pose difficulties for the success of these services.

Conclusion

Forfeiting has been increasingly in popularity because of the limitations of the traditional sources of export finance. With the decline in the attractiveness of the traditional modes of export financing, the benefits of forfeiting become quite self evident. With a view to boost the exports, financial institutions and banks could indeed take a hard look at forfeiting at least to put the Indian exporter on par with his competitors from other countries. Over a period of time, forfeiting is likely to emerge as an alternate source of trade finance especially for deferred exports.