With so many financing solutions out there, it can be difficult to make sense of your options. For example: what is the difference between receivables factoring and forfaiting? How to determine which one works for your company? In today’s blog post, we answer all these questions.
What Is Receivables Factoring?
Receivables factoring is the process where businesses sell their accounts receivable to a company known as “factor”.
The factor pays the business immediately (minus a small fee) and then proceeds to collect the invoices.
The main benefit of factoring is that it allows businesses to improve their cash flow immediately instead of having to wait 30 to 90 days (or more!) for their customers to settle their invoices.
There are two types of factoring: recourse and non-recourse. With recourse factoring, you are still responsible if your customers don’t pay the factor. With non-recourse factoring, on the other hand, the factor assumes all the risk of a non-payment so you are not responsible for any unpaid invoices.
What Is Forfaiting?
Forfaiting is a trade finance method where an exporter obtains cash by selling their medium- and long-term foreign accounts receivable to a company called “forfaiter.”
Once the accounts receivable are sold, the forfaiter is responsible for collecting payments from foreign buyers.
Similar to what happens with receivables factoring, forfaiting allows exporters to improve their cash flow without having to wait for their customers to pay them.
What Is the Difference Between Factoring and Forfaiting?
As you can see, there are many similarities between these two financing solutions as both use some of the same basic principles.
However, there are a couple of key differences between factoring and forfaiting.
First off, factoring is used by companies focused on the domestic market while forfaiting is an instrument geared toward exporters who work with international clients.
Additionally, payments made through forfaiting are usually without recourse. While this makes forfeiting an extremely safe option for exporters, it also means that the fees associated with forfeiting are high in order to compensate the forfaiter for the increased risk they face.
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, and have many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.
Reach out today by email (firstname.lastname@example.org) telephone (909-946-5599), or through our social media accounts on Facebook, Twitter, and YouTube, and start enjoying the convenience of converting your accounts receivable into cash today!