Page 204 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 13: Factoring and Forfeiting

13.5 Summary Notes

Factoring may be defined as the relationship, created an agreement, between the seller of
goods/services and a financial institution.

Forfeiting 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.

In addition to the rendering of factoring services, banks financial institutions also provide
bills discounting facilities provide finance to the client.

The bill of exchange is an instrument in writing containing an unconditional order, signed
by the maker, directing a certain person to pay a certain sum of money only to, or to the
order of, a certain person, or to the bearer of that instrument.

13.6 Keywords

Account receivables: Any trade debt arising from the sale of goods/services by the client to the
customer on credit.
Client: He is also known as supplier. It may be a business institution supplying the goods/
services on credit and availing of the factoring arrangements.
Customer: A person or business organisation to whom the goods/services have been supplied
on credit. He may also be called as debtor.

Eligible debt: Debts, which are approved by the factor for making prepayment.
Open account sales: Where in an arrangement goods/services are sold/supplied by the client to
the customer on credit without raising any bill of exchange or promissory note.
Prepayment: An advance payment made by the factor to the client up to a certain percent of the
eligible debts.
Retention: Margin maintained by the factor.

13.7 Self Assessment

Fill in the blanks:
1. Banks do not open LCs and purchase/discount/negotiate bills bearing the .....................
clause.
2. The bill of exchange is an instrument in writing containing an .................. order.
3. Factoring services like 'undisclosed factoring' are .................. in nature.

4. Factoring undertakes to ........................ the bills of the client.
5. The forfeiting owes its origin to a French term ......................
6. ..................... may broadly be defined as the relationship, created an agreement, between
the seller of goods/services and a financial institution.
7. For ..................... in receivables, a firm has to incur certain costs such as costs of financing
receivables and costs of collection from receivables.

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