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Factoring vs forfaiting: Understanding the difference between factoring and forfaiting in export financing
Factoring and forfaiting are two methods of export financing, each with its own terms and applications. Explore the key differences between them in the blog.
Timely cash flow is vital for export businesses. That’s why exporters in India and across the globe are turning to financing tools like factoring and forfaiting to stay competitive.
This blog explores the core difference between factoring and forfaiting in export financing. It breaks down how each method works, gives real-world examples relevant to Indian exporters, and helps businesses decide which is better suited for their trade needs.
This blog explores the core difference between factoring and forfaiting in export financing. It breaks down how each method works, gives real-world examples relevant to Indian exporters, and helps businesses decide which is better suited for their trade needs.
What is factoring?
Factoring is a financial method where a business sells its accounts receivables (outstanding invoices) to a financial institution, such as a bank. In return, the exporter receives an immediate advance, usually 70–90% of the invoice value, allowing them to maintain steady cash flow.
Factoring is common in short-term export transactions, especially where credit periods range from 30 to 180 days. Indian exporters operating on open account terms or with repeated clients often choose export factoring.1
Factoring is common in short-term export transactions, especially where credit periods range from 30 to 180 days. Indian exporters operating on open account terms or with repeated clients often choose export factoring.1
Example of factoring
Suppose an Indian exporter of handicrafts sells goods worth ₹10 lakh to a retailer in the United States on a 60-day credit period. To manage their working capital and fulfill subsequent orders, the exporter sells this invoice to a factoring company for a discounted amount, say ₹9.5 lakhs. The factoring company immediately pays the exporter this amount. After 60 days, the factoring company collects the full ₹10 lakhs from the US retailer. This transaction provides the exporter with the necessary funds upfront, freeing them from the administrative burden of chasing international payments and the credit risk associated with the buyer.2
What is forfaiting?
Forfaiting is a financing method used for medium- to long-term export receivables. It involves selling promissory notes or bills of exchange (usually guaranteed by the importer’s bank) to a forfaiter at a discount, in exchange for upfront payment.
Forfaiting is typically used for capital goods or large, one-time transactions with credit periods ranging from six months to seven years. Indian exporters of machinery, infrastructure components, or engineering goods can benefit from forfaiting.3
Forfaiting is typically used for capital goods or large, one-time transactions with credit periods ranging from six months to seven years. Indian exporters of machinery, infrastructure components, or engineering goods can benefit from forfaiting.3
Example of forfaiting
Suppose an Indian manufacturing company wins a contract to supply heavy machinery worth ₹5 crores to a firm in the UK. The payment is structured over three years. To eliminate the risk of the buyer defaulting and to receive immediate cash, the manufacturing company sells the long-term promissory notes from the buyer to a forfaiting institution. The forfaiter purchases these receivables for a discounted amount, for example, ₹4.8 crores, and pays Mumbai Motors upfront. The forfaiter then becomes responsible for collecting the payments from the British firm over the next three years. This arrangement allows the manufacturers to secure a large amount of capital immediately and transfer all risk of non-payment to the forfaiter, enabling them to focus on their core business operations without financial uncertainty.4
Difference between forfaiting and factoring
Understanding the core difference between factoring and forfaiting can help Indian exporters choose the appropriate financing route:
Criteria
Factoring (Export Factoring)
Forfaiting
Primary use
Short-term export or import receivables (<180 days)
Medium- to long-term international receivables (90 days–7 years)
Typical users
SMEs, businesses with frequent, lower-value transactions
Exporters of capital goods; large, high-value exports
Recourse
Can be with or without recourse
Always non-recourse
Risk
Shared or borne by exporter in recourse factoring
Fully transferred to forfaiter
Financing percentage
80–90% of invoice value
Up to 100% of receivable value
Nature of goods
Consumer goods, raw materials, textiles
Capital goods, infrastructure
Documentation
Not backed by letter of credit or other documentation
Bills of exchange, promissory notes required
Fees/buyer involvement
Paid by seller/exporter; generally higher due to short-term risk
Paid by overseas buyer; lower for high values
Market applicability
Domestic and international trade
Exclusively international trade
Secondary market existence
No secondary market
Secondary market for tradable instruments5
Which is better for your business: Factoring or Forfaiting?
Choosing between forfaiting and export factoring depends on the nature of your exports. Indian MSMEs exporting consumer goods on credit terms benefit more from factoring due to the recurring nature and shorter credit cycle. For exporters dealing in high-value capital goods, forfaiting provides better risk mitigation and cash flow certainty.6
Conclusion
Both factoring and forfaiting play pivotal roles in the export financing landscape for Indian exporters. Understanding the difference between factoring and forfaiting can help businesses access faster cash flows and mitigate trade risks effectively. Factoring works best for short-term, recurrent transactions typical in everyday exports, while forfaiting provides robust support for capital-intensive, long-term deals.
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Frequently Asked Questions
1. What type of negotiable instruments are used in forfaiting?
The negotiable instruments commonly used in forfaiting include bills of exchange and promissory notes, and sometimes letters of credit. These instruments serve as legal documents that facilitate the transfer of rights to trade receivables in forfaiting transactions.
2. What are the limitations of factoring?
Some limitations of factoring include potential high costs, dependence on the creditworthiness of customers, limited control over customer relationships, and the inability to factor in certain types of receivables or industries.
3. What is an example of forfaiting?
An example of forfaiting is when an exporter sells their long-term accounts receivable for capital goods, such as machinery or equipment, to a forfaiter in exchange for immediate cash payment.
4. Is factoring or forfaiting right for my business?
Determining whether factoring or forfaiting is suitable for your business depends on various factors, such as the nature of your trade, types of goods involved, risk tolerance, and financing needs. Consulting with financial experts can help you make an informed decision.
5. What is the difference between a confirmed LC and a standby LC?
A confirmed LC is a payment guarantee that assures the exporter of payment upon meeting specified conditions. A standby LC acts as a backup to support the importer’s payment obligations in case of default.
Published on October 18, 2023.
Updated on September 22, 2025.
Sources:
1. https://www.clear.in/s/factoring-vs-forfaiting
2. https://www.investopedia.com/terms/f/factor.asp#toc-example-of-a-factor
3. https://www.tatacapital.com/blog/loan-for-business/what-is-forfaiting-benefits-and-process-with-steps/
4. https://www.dripcapital.com/en-in/resources/finance-guides/forfaiting-vs-factoring
5. https://www.tradewindfinance.com/news-resources/international-trade-finance-companies-factoring-vs-forfaiting/
https://www.geeksforgeeks.org/finance/difference-between-forfaiting-and-factoring/
https://www.geeksforgeeks.org/finance/difference-between-forfaiting-and-factoring/
https://payglocal.in/blog/factoring-and-forfaiting-in-trade-finance
6. https://payglocal.in/blog/factoring-and-forfaiting-in-trade-finance
Updated on September 22, 2025.
Sources:
1. https://www.clear.in/s/factoring-vs-forfaiting
2. https://www.investopedia.com/terms/f/factor.asp#toc-example-of-a-factor
3. https://www.tatacapital.com/blog/loan-for-business/what-is-forfaiting-benefits-and-process-with-steps/
4. https://www.dripcapital.com/en-in/resources/finance-guides/forfaiting-vs-factoring
5. https://www.tradewindfinance.com/news-resources/international-trade-finance-companies-factoring-vs-forfaiting/
https://www.geeksforgeeks.org/finance/difference-between-forfaiting-and-factoring/
https://www.geeksforgeeks.org/finance/difference-between-forfaiting-and-factoring/
https://payglocal.in/blog/factoring-and-forfaiting-in-trade-finance
6. https://payglocal.in/blog/factoring-and-forfaiting-in-trade-finance
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