How does forfaiting differ from factoring?

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justaguide eNotes educator| Certified Educator

Forfaiting and factoring are financing arrangements that are commonly used in cross-border transactions to allow a credit facility for the buyer who can pay the seller over an extended period of time.

The two though are not the same and there are several important differences between the two.

In factoring only a part of the transaction amount is financed, while forfaiting involves the financial institution providing finance for the complete amount.

In factoring, the financial institution representing the seller has to directly collect funds from the buyer, while in forfaiting all the funds are collected from the bank representing the buyer.

In factoring, credit is provided for a short duration of time and the bank handles all the accounting procedures as repayment is made. In forfaiting there is provision of the total amount and no further services are provided by the financial institution. It is only concerned with collecting funds as repayment of the credit extended is done.