Differences Between Factoring and Other Financing Methods
Factoring vs. forfeiting
Forfeiting is a form of medium-term financing of capital goods or even commodities where the bank or other financial institutions purchases bills of exchange, drafts or notes that have been guaranteed by a bank chosen by the foreign buyer /importer. It is usually employed for periods of between 1 and 5 years and at a fixed interest rate, which is the discount rate used by the exporter's bank when purchasing the instruments.
• Factors usually want access to a large percentage of an exporter's business, while most forfeiters work on a one-time basis.
• Forfeiters generally work with medium and long-term receivables (180 days to 10 years), while factors work with short-term receivables (up to 180 days).
• Payment terms usually reflect the type of product involved. Forfeiters work with capital goods, commodities and large projects, while factors work with consumer goods.
• Most factors do not have strong capabilities in developing regions of the world where legal and financial framework are inadequate and credit information is not readily available through affiliate factors.
However, since forfeiters usually require a bank guarantee, most factoring houses are willing to work with receivables from these higher-risks, emerging markets.
Accounts receivable financing
In accounts receivable financing, ownership of the accounts receivables is never legally assigned to the financing company. Instead, the financing company receives a pledge of the accounts as collateral securities for the repayment of the loans and files a financing statement to perfect that security interest. If the account debtor fails to make the payment, the account receivables' owner remains liable for the unpaid amounts
• In accounts receivables financing, the ownership of the accounts receivables stays with the seller, whereas the factoring company becomes the owner of the invoices ceded by the adherent.
• If the debtor fails to make a payment, the seller is still liable, while for factoring, the risk of incurring this loss is transferred from the adherent to the factoring company, except for the non-recourse type of factoring.
• In account receivables financing, the credit evaluation of the debtor is undertaken by the seller, while when factoring is involved, this is done by the factor.
• In accounts receivables financing, the collection of debts is undertaken by the seller, whereas in factoring, usually the factor is concerned with this, or the adherent, if specified so in the factoring contract.