FACTORING
The factoring is a trade finance service in which a business sells its unpaid invoices (accounts receivable) to a financial institution (called a factor) at a discount in exchange for immediate cash. It helps improve cash flow without waiting for customers to pay.The factoring is mainly used in international export transactions involving medium-to-long-term receivables.
It means: Exporter sells future export receivables to a forfaiter without recourse.
Example
A US Machinery Exporter sells equipment worth USD 10 million to an African Buyer.
Payment term
Buyer pays through 5-year instalments.
Exporter does not want to wait 5 years.
A forfaiter purchases the receivables and pays the exporter immediately after discounting.
Features
-
Usually export transactions
-
Medium/long term (1–7 years or more)
-
Usually without recourse
-
Often supported by Bank guarantee , Export credit agency guarantees and Letters of Credit
Example:
An exporter → sells receivable →factorises → gets cash immediately.
INVOICE FINANCING
Invoice financing is a short-term working capital facility where a company raises money against unpaid invoices.
Example:
Invoice value: USD 5Million
Customer payment: after 60 days
Finance / Factoring Company provides 80% immediately
Balance after customer payment minus charges
Type
Invoice Discounting
The company keeps control of collections
Invoice Factoring
The factor manages collections.
Used by:
SMEs
Traders
Manufacturers