The main problem nowadays when trading with foreign countries is to obtain payments from importers. Financing companies offer financial support to traders in exchange for fees, and guarantees. There are two types of financing forms: factoring and forfaiting. They are widely used as alternative financing tools to banks.
Factoring is the process of purchasing invoices from a business at a certain discount. Factors provide financing service to small an medium-sized companies who need cash. For this the factor charges a fee equal to a percentage of the invoices purchased generally 5%. Factoring is a low value short term financing forms. It involves the purchase of invoices, for an amount less than $10,000 an 90-120 days payment terms. After shipping your goods or services, the factor purchases the invoices, and advances cash to you company. Factoring provide liquid assets to small business. In fact banks have strict criteria when lending money so it is difficult for these companies to obtain loans.
Forfaiting is the purchase of a series of credit instruments such as drafts, bills of exchange, other freely negotiable instruments on a nonrecourse basis. Nonrecourse means that if the importer does not pay, the forfeiter cannot recover payment from the exporter.
The exporter gets immediate cash on presentation of relevant documents and the importer is the liable for the cost of the contract and receives credit for x” years and at certain per cent interest.
The forfaiter deducts interest at an agreed rate for credit period. The debt instruments are drawn by the exporter, accepted by the importer, and will bear an aval or unconditional guarantee, issue by the importers bank. The forfeiter takes over responsibility for claiming the debt from the importer. The forfeiter holds the notes until maturity, or sells them to another investor. The holder of the notes presents each note to the bank at which they are payable, as that fall due.
Forfaiting is a high-value medium and long term financing form. It involves the purchase of negotiable instruments for not less than $100.000 and from six month to five years payment terms. The forfeiter needs to know some important information, such as:
who the buyer is and his nationality
what goods are being sold
date and duration of the contract
interest rate already agreed with the buyer
negotiable instruments used identity of the guarantor of payment