Page 105 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

International Trade Procedures and Documentation

Notes Benefits to Exporter

100 per cent financing: Without recourse and not occupying exporter’s credit line that is to
say once the exporter obtains the financed fund, he will be exempted from the responsibility
to repay the debt.
Improved cash flow: Receivables become current cash in flow and it is beneficial to the
exporters to improve financial status and liquidation ability so as to heighten further the
funds raising capability.
Reduced administration cost: By using forfeiting, the exporter will spare from the
management of the receivables. The relative costs, as a result, are reduced greatly.
Advance tax refund: Through forfeiting the exporter can make the verification of export
and get tax refund in advance just after financing.

Risk Reduction

Forfeiting business enables the exporter to transfer various risk resulted from deferred payments,
such as interest rate risk, currency risk, credit risk, and political risk to the forfeiting bank.
Increased trade opportunity: With forfeiting, the export is able to grant credit to his buyers
freely, and thus, be more competitive in the market.

Benefits to Banks

Forfeiting provides the banks following benefits:
Banks can offer a novel product range to clients, which enable the client to gain 100%
finance, as against 80% to 85% in case of other discounting products.

Bank gain fee based income.
Lower credit administration and credit follow up

5.4.2 Factoring

Definition of factoring is very simple and can be defined as the conversion of credit sales into
cash. Here, a financial institution which is usually a bank buys the accounts receivable of a
company usually a client and then pays up to 80% of the amount immediately on agreement.
The remaining amount is paid to the client when the customer pays the debt. Examples includes
factoring against goods purchased, factoring against medical insurance, factoring for construction
services, etc.
Characteristics of Factoring

1. The normal period of factoring is 90 – 150 days and rarely exceeds more than 150 days.
2. It is costly.
3. Factoring is not possible in case of bad debts.
4. Credit rating is not mandatory.
5. It is a method of off balance sheet financing.

6. Cost of factoring is always equal to finance cost plus operating cost.

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