Forfaiting & Factoring – What is the Difference?
The two differ primarily on their scope and coverage. While factoring involves a firm selling its AR to a factor over a period of time, forfaiting involves the seller selling individual AR as a single transaction. Therefore while factoring could theoretically be a facility in perpetuity, a forfaiting transaction is co-terminus with the tenor of the AR. It follows therefore that factoring pre-supposes the existence of an ongoing relationship between the seller and their buyer whilst forfaiting could be between two unrelated parties. Since forfaiting assumes all risk in the AR, the counterparty is usually a financial institution unlike factoring which engages with companies. Also since factoring is used as a day-to-day working capital medium, it usually involves high volume–low value transactions as opposed to forfaiting which is largely high value-low volume.
