Page 199 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes 13.1 Meaning of Factoring and Forfeiting

Factoring may broadly be defined as the relationship, created an agreement, between the seller
of goods/services and a financial institution called the factor, whereby the later purchases the
receivables of the former and also controls and administers the receivables of the former.
Factoring may also be defined as a continuous relationship between financial institution (the
factor) and a business concern selling goods and/or providing service (the client) to a trade
customer on an open account basis, whereby the factor purchases the client's book debts (account
receivables) with or without recourse to the client - thereby controlling the credit extended to
the customer and also undertaking to administer the sales ledgers relevant to the transaction.
The term "factoring" has been defined in various countries in different ways due to
non-availability of any uniform codified law. The study group appointed by International
Institute for the Unification of Private Law (UNIDROIT), Rome during 1988 recommended, in
simple words, the definition of factoring as under:
"Factoring means an arrangement between a factor and his client which includes at least two of the
following services to be provided by the factor:
1. Finance
2. Maintenance of accounts

3. Collection of debts
4. Protection against credit risks".
The above definition, however, applies only to factoring in relation to supply of goods and
services in respect of the following:
1. To trade or professional debtors
2. Across national boundaries
3. When notice of assignment has been given to the debtors.
The development of factoring concept in various developed countries of the world has led to
some consensus towards defining the term. Factoring can broadly be defined as an arrangement
in which receivables arising out of sale of goods/services are sold to the "factor" as a result of
which the title to the goods/services represented by the said receivables passes on to the factor.
Hence the factor becomes responsible for all credit control, sales accounting and debt collection
from the buyer (s).
The forfeiting owes its origin to a French term 'a forfait' which means to forfeit (or surrender)
ones' rights on something to some one else. Forfeiting is a mechanism of financing exports:
1. by discounting export receivables
2. evidenced by bills of exchanges or promissory notes
3. without recourse to the seller (viz; exporter)

4. carrying medium to long-term maturities
5. on a fixed rate basis up to 100% of the contract value.
In other words, it is trade finance extended by a forfeiter to an exporter seller for an export/sale
transaction involving deferred payment terms over a long period at a firm rate of discount.
Forfaiting is generally extended for export of capital goods, commodities and services where
the importer insists on supplies on credit terms. Recourse to forfaiting usually takes place where

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