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Chapter 5:
FACTORING AND FORFEITING

Chapter 5: Factoring and Forfeiting

Objectives:
- Understand concept of Factoring and Forfeiting, their
feature and procedure
- Evaluate different type as well as Pros and Cons of each
form
- Compare Factoring and Forfeiting
- Make decision of applying Factoring and Forfeiting.

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Contents

I. Factoring
1. Concept
2. Classification
3. Parties to Factoring
4. Procedure
5. Pros and Cons
II. Forfeiting
1. Concept
2. Parties to Forfeiting
3. Procedure
4. Feature
5. Comparison Factoring and Forfeiting

I. Factoring

1. Concept:
 Cen. 13 had debt collection and short-term credit
 Cen. 17-18 had trade agency sold based on trade credit
 Receivables financing is the procedure by which debts
are sold in the market to increase liquidity. The
mechanism for such dealings is based on assignments of
debts.
 International factoring is one specific type of receivables
financing, besides forfaiting, leasing and securitization.

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1. Concept

 International factoring is one specific type of receivables

financing.

 Factors have existed to receive payment and refund to

sellers

 Factoring represents the sale of outstanding

receivables related to export of goods by the exporter to
overseas buyers.

1. Concept

A factoring contract means a contract pursuant to which a

supplier may or will assign accounts receivable to a factor,
whether or not for the purpose of finance, for at least
one of the following functions:
 - Receivables ledgering
 - Collection of receivables
 - Protection against bad debts
(Article 1 - General Rules For International Factoring – FCI)

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1. Concept
Unidroit Convention on International Factoring (28 May 1988)

Factoring contract ”means a contract concluded between one party

(the supplier) and another party (the factor) pursuant to which:
(a) the supplier may or will assign to the factor receivables arising
from contracts of sale of goods made between the supplier and
its customers (debtors) other than those for the sale of goods
bought primarily for their personal, family or household use;
(b) the factor is to perform at least two of the following functions:
• finance for the supplier, including loans and advance payments;
 maintenance of accounts (ledgering) relating to the receivables;
 collection of receivables;
 protection against default in payment by debtors;
(c) notice of the assignment of the receivables is to be given to
debtors
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Law on credit institutions, 2010, VN

Article 4. Interpretation of terms

 17. Factoring means a form of extension of credit to a goods
seller or buyer through redeeming receivable or payable
amounts arising from the purchase or sale of goods or
provision of services under a contract on goods purchase or
sale or service provision while reserving the right to claim
such amounts.

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Law on credit institutions, 2010, VN

 Credit extension means an agreement allowing an

organization or individual to use a sum of money or a
commitment allowing the use of a sum of money on the
repayment principle by such professional operations as
lending, discount, financial leasing, factoring, bank
guarantee and other credit extension operations.

1. Concept

Art.2- Decision No1096/2004/QD-NHNN dated 6Sept2004

 Factoring is type of credit provided by credit institutions
to seller through purchasing receivables arising from
sale of goods under sale contract.
It is to be replaced by Circular No.02/2017- NHNN dated
17/5/2017 from 30/9/2017.
 Factoring contract means an agreement between factor
and its customer to the establishment, modification or
termination of rights and obligations of these parties
related to factoring

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1. Concept

4 main functions:
 Finance the working capital
 Receivables ledgering
 Collection of receivables
 Protection against bad debts

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2. Classification

 In terms of geographic area

 Domestic factoring
 International factoring
 In terms of factor system
 One factor system factoring
 Two factor system factoring
 In terms of client of factor
 Import factoring
 Export factoring

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Domestic and international

 Domestic factoring
 Underlying transaction between seller and buyer who
are resident/same country
 International factoring
 Underlying transaction between parties in different
countries or non resident and resident.

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One factor and two factor system

 In terms of factor system

 One factor system factoring: usually used for
domestic factoring transaction. Factoring service is
provided by only one factor.
 Two factor system factoring: for international factoring
Reason for using two factor system factoring
- Geographic distance
- Difference in language, rules,
- Partner relationship
- Knowledge on partner’s credit standing

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One factor system factoring

Factor

Funds (Purchase
price)

Present
Sales of Price- documents
factoring discount rate (B/E, Invoice…)
documents

Supplier Buyer
(0) Underlying
contract

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Two factor system

 The two factor system is supported by the existence of

chains of correspondent factors.
 These where established for the purpose of facilitating
the cooperation between import and export factors by
the development of common rules and accounting
procedures.
 There are members of factoring chains in most major
trading nations.
 Some of them restrict their membership to one factor per
country (closed chains), while others are open to the
participation of multiple factors in the same country
(Factors Chain International).

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Two factor system factoring

Price- charge
Export Import
Factor Factor
Factoring
agreement
Price –
discount rate Funds
Sales of
(Price)
factoring Factoring
documents agreement

Supplier Distributor/
Exporter Importer
(0) Underlying
contract

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2. Classification

 In terms of operating mechanism

 Direct Import- Export factoring
 Back to back factoring
 In terms of risk of non-payment
 Recourse factoring
 Non recourse (without recourse) factoring
 In terms of sharing information
 Disclosed factoring
 Undisclosed factoring

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Direct import and export factoring

 Direct import factoring connotes the situation where

the exporter assigns debts to a factor in the country of
the debtor.
 where there is a substantial volume of exports to a
specific country.
 cheap and time efficient method of debt collection but
not serve the aim of providing finance to the exporter.
 The factor provides a debt collection service and does
not enquire into the creditworthiness of the importer.
 Prepayments are not possible because that would
expose the factor to high risks.

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Direct import and export factoring

 Direct export factoring does operate as an alternative to
the two factor system.
 The factor is appointed in the exporter’s own country and
deals with all the aspects of the factoring arrangement
including the provision of financing and the assessment of
the financial position of the importer.
 This system is inexpensive and facilitates the
communication between the exporter and the factor.
 However, all the advantages of the two factor system
relating to the import factor’s proximity to the importer and
his jurisdiction can be listed here as disadvantages.
 Communication problems with the debtor, credit risks and
the occurrence of disputes are the most important
problems.
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Back to back factoring

 is an arrangement most suitable for debts owed by the

exclusive distributors of products to their suppliers.
 The structure is similar to the ones already considered
with one material difference.
 The difference lies in the existence of a separate
factoring agreement between the import factor and the
distributor.
 Included in that arrangement is a right to set off credits
arising from the domestic sales of the distributor with his
debts to the supplier
 This is to guard against default by the distributor due to
the fact that the goods have already been sold to third
parties and thus the supplier cannot take a security
interest over them to guarantee repayment of the debts
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Back to back factoring

Export Import
Factor Factor
Factoring
agreement

Sales of Factoring Separate

factoring agreement Factoring
documents agreement

Supplier Distributor
(0) Underlying
contract
Third
party
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Recourse Factoring

 Factor purchases Receivables on the condition

that loss arising on account of non-recovery will
be borne by the Client.
 Credit Risk is with the Client.
 Factor does not participate in the credit sanction
process.
 Up to 75% - 85% of the Invoice Receivable is
factored.
 Interest is charged from the date of advance to
the date of collection.
Ex: In India, VN factoring is done with recourse.

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Non-recourse Factoring (Without recourse)

 Factor purchases Receivables on the condition

that the Factor has no recourse to the Client, if
the debt turns out to be non-recoverable.
 Credit risk is with the Factor.
 Higher commission is charged.
 Factor participates in credit sanction process and
approves credit limit given by the Client to the
Customer.
 In USA/UK, factoring is commonly done without
recourse.

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Disclosed factoring

 Disclosed factoring is the arrangement under which the

exporter enters into a factoring agreement with the
financial house and assigns the benefit of the debts
created by the sale transaction to them.
 The importer is then notified and effects payment to
the factor. The arrangement is usually on a non-
recourse basis

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Undisclosed factoring

 Undisclosed factoring, which is usually undertaken on a

recourse basis, does not involve the importer.
 The agreement is made between the factor and the
exporter and the importer remains bound to pay as
agreed under the sales contract.
 In receipt of payment, the exporter holds the funds in a
separate bank account as trustee for the factor

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3. Parties to Factoring

Parties:
 Factor agency
 client or seller
 debtors or buyers

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3. Parties to Factoring

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4. Procedure of Factoring

How Factoring Works

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4. Procedure of Factoring

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4. Procedure of Factoring

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4. Procedure of Factoring

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5. Application of Factoring

 Pros:
 Improve working capital flow and money
management
 Limit the risk through non-recourse factoring
 Improve the competency & creditability
 Factor can be strategic partner
 Cons:
 Higher cost than credit/discounting
 Limit the credit lines
 Usually medium-term
 Complicated Law and Rules related
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II. Forfaiting

 Forfaiting (or Forfeiting) is a mechanism by

which the right for export receivables of an
exporter (Client) is purchased by a Financial
Intermediary (Forfaitor) without recourse.
 Deals with receivables relating to deferred
payment exports in medium-long-term ><
Factoring deals with short term receivables
 Have secondary market in London for
forfating papers

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1. Concept of Forfaiting

 Forfaiting or without-recourse financing is a method

of trade finance whereby the forfaiting bank
purchases, on a without-recourse basis,
unconditional debt obligations arising from the
provision of goods and/or services which are due to
mature at a future date.
 The term originates from a forfait finance which
simply means that the exporter forfeits all rights to
future receivables in exchange for immediate
payment.

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2. Features of Forfaiting

Features
 Forfaitor discounts documentary with non-recourse 
exporter transfer all inherent risks to the forfaitor
 Goods are usually mechanics or projects with long-
term payment (5-7 years)
 Fixed rate basis (Libor + %)
 Documentary needs to be guaranteed by 3rd party

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2. Features of Forfaiting

Some of the advantages of forfaiting to the exporter

can be summarized as follows:
• conversion of a credit transaction into a cash
transaction
• elimination of all political and credit risks
• simple documentation
• improve liquidity
• elimination of exchange risks
For the importer, forfaiting gives him the flexibility to
pay for his goods on deferred terms of credit and at a
fixed interest cost.

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3. Application

 Forfaiting is a financial technique designed to meet

the challenge of difficult markets, and although
several of the areas to which it was best applied
originally now trade without the need to seek
medium- to long-term finance, it still has an
important role to play in international trade.

 Forfaiting can provide a way for exporters to finance

sales to valued corporate clients even in the most
difficult circumstances.

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3. Application

 Goods financed can include commodities, capital

equipment, spare parts and services which may
originate from any country because, unlike ECAs,
forfaiters face no restrictions concerning the origin of
goods.
 Where an export has been agreed for a forfait
finance, if it should be frustrated the finance can still
be available if the goods are sold internally.

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3. Application

Pros:
 Improve working capital flow
 Credit Sale gets converted as Cash Sale
 Finance available up to 100% of value (unlike
in Factoring)
 Pass the inherent risk & Interest risk and Inflation
(without recourse)
 Reduce Bad debt
Cons
 High cost ( all related inherent risk & Interest risk)

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Forfeiting procedure

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3.1 9
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Forfeitor Người bảo lãnh
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Finance of International Trade, Eric

Bishop
Forfaiting Process

(2) Commercial contract

Exporter (3) Deliver goods Importer
(6) Deliver documents

(5) Hand over documents

(4) Give guarantee

(9) Repay maturity

(1) Commitment

(7) Pay cash

(8) Present documents for payment

Forfaiting bank Importer’s bank
(9) Pays at maturity

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