Though financial transactions involved in ‘factoring’ and ‘forfaiting’ appears alike, these two terms are different in their nature, perception and scope.
From the below table, let us find out the key difference between factoring and forfaiting;
| FACTORING | FORFAITING |
| Factoring is a financial arrangement whereby a supplier of goods sells its trade receivables to the factor at discounted price for immediate cash payment. | Forfaiting is relinquishing the right (selling the claim) on trade receivables by an exporter to a forfeiter at discounted price for immediate cash payment. |
| Factoring can be with or without recourse | Forfaiting is always without recourse |
| Factoring refers to discounting of trade receivables of short maturities. | Although discounted receivables often have maturities over medium terms of 1 to 3 years they can be as short as 1 month or as long as 10 years. |
| Factoring involves trade receivable on ordinary goods. | Forfaiting usually takes place on trade receivable on capital goods, but it can be applied to a wide range of trade related and even purely financial receivables and payment instruments. |
| Factoring transaction does not set up in Negotiable Instrument. | Forfaiting establishes on negotiable instrument. |
| Factoring does not deal in secondary market. | Forfaiting may involve dealing in secondary market
|
| Factor disburses payment of the invoices immediately to the customer, which will be usually up to 80% of their value, | The exporter gets 100 percent financing , and also escapes from various types of risks involved in export business viz. interest rate risk, currency risks, credit risk and political risk etc. involved in deferred payments. |
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