What is the Difference Between Factoring and Forfaiting?

What is the difference between Factoring and Forfaiting and how can it help your import/export business?

During difficult financial times many import/export businesses are looking for new ideas to increase their cash crunches. Import/Exporting can have astronomical rewards because you can make a profit by getting the best benefits of two economies, a low cost production economy as well as a high purchasing economy. Much of North America and Western Europe import a large percentage of their goods. There are many opportunities navigating global economies; however almost all of these opportunities require large amounts of short term cash for purchasing, production, and transport. Factoring and Forfaiting are two key strategies to help importers and exporters to get a start in business as well as increase short term and long term cash flow.

Factoring is when a company trade account receivables that may take 30, 60, 90, or even 120 days for immediate upfront cash to pay for vendors, payroll, supplies, or other expenses. Factoring involves using a third party company who will provide cash upfront for a fee. Usually the third party will hold back a portion of the total invoice as surety i.e. a $100,000 invoice factoring company may give your $60,000 to $80,000. When the accounts receivable is paid the factoring company will return all of the funds to the exporter minus any applicable charges. Factoring companies prefer

Forfaiting is usually used for medium and long term debt (1-10 years). Similar to factoring the Forfaiting company will take full responsibility for receiving the payments from the purchaser (importer) in exchange for a letter of credit, line of credit, or cash to the seller (exporter). Forfaiting may by used for only one account or several accounts. The key difference between forfaiting and factoring is that Forfating companies keep a portion of the accounts receiveable whereas a factoring company will return the balance minus their fees.

Both financial devices require a few key parts. First the person or entity buying the goods or service must be creditworthy and pay their obligations on a timely basis. No one wants to offer factoring or forfaiting for a client that's a dead beat. In factoring a company that pays in 90 days versus 60 days may result in an extremely costly price for the exporter or company seeking the factoring. Remember these are just a new strategy in an arsenal of an entrepreneur or business buyer. Like all strategies you need to know all the costs involved, calculate your margins, and be prepared the best strategy for your situation.