Difference between factoring and forfaiting

Differences between factoring and forfaiting

Eventhough factoring and forfaiting involve financing of trade, they both differ in certain aspects explained below.

factoring and forfaiting

Factoring and Forfaiting:

1. Factoring is both domestic and foreign trade finance. Whereas forfaiting is only financing of foreign trade.

2. Factoring provides only 80% of the invoice. But 100% finance is provided in forfaiting.

3. In factoring, invoice is purchased belonging to the client. Whereas the export bill is purchased in forfaiting.

4. There is no letter of credit involved in factoring. But there is letter of credit involved in forfaiting.

5. Factoring may have recourse to seller in case of default by buyer. But there is no recourse to exporter in forfaiting.

6. Factoring does not provide scope for discounting in the market as only 80% is financed. But forfaiting provides scope for discounting the bill in the market due to 100% finance.

7. Factoring may be financing a series of sales involving bulk trading. Only a single shipment is financed under forfaiting.