Bill Discounting and Forfaiting

26/09/2022

India Factoring (Leading Factoring Service provider) Fuelling Your Business Requirements

Many businesses face hardcore problems in relation to credit facilities. These facilities are used to increase sales and loyalty. None of the businesses, big or small, is an exception in facing cash flow problems. Some or the other way, your working capital gets hindered whenever the money is stuck in accounts receivables.

India Factoring the leading factoring company in India leverages you to keep your account receivables unaffected through bill / invoice discounting. It helps you enjoy collateral-free access to your business.

Before we move further, let us understand what bill discounting is and how India factoring helps your businesses through bill / invoice discounting to have improved and visible cash flow.

Bill / invoice discounting (What Bill / invoice discounting means)

Under this type of lending, Bank takes the bill / invoice drawn by the borrower on his (borrower's) customer and pays him immediately deducting some amount as a discount/commission. The Bank then presents the Bill / invoice to the borrower's customer on the due date of the Bill and collects the total amount.

Through bill / invoice discounting India Factoring helps businesses to trade the company's unpaid invoices to gain access to short-term financial assistance and maintain their working capital. It is most pertinent in cases when a buyer purchases goods from the seller and the payment is made through a letter of credit. This process is also called “Bill / invoice Discounting”.

Get more information on bill / invoice discounting services at email ID info@indiafactoring.in

Process of Bill / invoice Discounting

The Bill / invoice Discounting process covers the following points: -

1. From the date of sale, the business generates an invoice that should usually cover time of upto  180 payable days.
2. Through India Factoring website a business can upload unpaid invoices, & other documents digitally.
3. Investors in India Factoring purchase invoices at a discounted rate and then the value offered by the India Factoring investor will be transferred to the business account within 24 to 72 for further approval.
4. Finally, the business gets its required funds along with essential working capital.

Bill Discounting Vs Collateral Based Funding (Asset based loan) –

Well Bill discounting is not like an asset based loan. The interest rates under Bill discounting are decided based on many factors such as the risk factor, and the financial institute.

	Bill discounting	Asset based loan
1	Collateral-free finance	Collateral required
2	Quick processing	Long processing
3	Digital process	Not a digital process
4	Hassle-free documentation	Lengthy documentation
5	Simple eligibility criteria	Stringent eligibility requirements
6	Order Based Funding	Worked on MPBF Method

As people generally confuse bill discounting with normal asset-based funding. Although, trade discounting, factoring and forfaiting have gained a lot of popularity among businesses their nature, policies, terms, and scopes are totally poles apart.

Factoring and Forfaiting

As I have mentioned in my previous blogs as well Factoring in India involves the rendering of services varying from the bill discounting facilities offered by commercial banks to a total take-over of administration of the sales ledger and credit control functions, from credit approval to collecting cash, credit control functions, from credit approval to collecting cash or credit. Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor in its receivable assets to meet its present and immediate cash needs.

Whereas, forfeiting means relinquishing the right. In this, the exporter renounces his dues keeping in consideration the future dates in respect to cash exchanged at a respective discount to the forfeiter.

To get a much clearer perspective let’s get a little deeper into the concept of differences between factoring and forfaiting.

Factoring vs forfaiting

Factoring 

•  Converts your receivables into ready cash.
•  Don't need to wait for the payment of receivables at a future date. 
•  Trade receivables on ordinary goods.       
•  Finance up to 80-90%        
•  Accomplishes Recourse or Non-recourse both
•  Non negotiable instrument deals

 Forfaiting

• Forfaiter purchases claims from the exporter in return for cash payment.
• Involves account receivables of medium to long-term maturities.
• Trade receivables on capital goods.
• Finance up to 100%
• Accomplishes only non-recourse
• Cost of forfaiting is borne by overseas buyer
• Deals in Negotiable instruments

Well, it becomes important to understand that under forfaiting the rights of the exporter are surrendered by him to receive payments from the importer. It’s a form of export financing in which the exporter sells the claim of trade receivables to the forfeiture and gets an immediate cash payment. Forfaiting deals in the accounts receivables whose maturity ranges from medium to long term. The sale of receivables on capital goods is made in forfeiting.

Type of Forfaiting

Majorly we can say the types of Forfaiting are as follows:-

• Promissory notes are issued by importers and provide a written promise to pay the exporter
• Bills of exchange are like promissory notes and are written orders that bind an importer to pay an exporter a fixed sum.
• Account receivables show the amount of money owing, and they are listed as yet to be paid on the current balance sheet
• Letters of credit are issued by banks and provide a guarantee that a debt will be paid even if the importer defaults.

 The types of forfaiting can also be categorised as follows:

1. Forfaiting under a usance L/C
2. Forfaiting under a sight L/C
3. Forfaiting under D/A
4. Forfaiting under domestic L/C
5. Forfaiting under credit insurance (non-recourse Rong Xin Da)
6. Forfaiting guaranteed by IFC or other international organizations

Forfaiting example

The following are key stages in a typical forfaiting transaction:

1. The exporter and forfaiter draft an agreement based on expected receivables, or invoice payments
2. The exporter and importer form a sales contract
3. The exporter delivers the goods to the importer
4. The importer’s bank provides a payment guarantee
5. Trade documents are exchanged between the importer and the exporter
6. The exporter and forfaiter exchange trade documents
7. The forfaiter pays the exporter
8. The forfaiter presents documents for payment to the importer’s bank
9. The importer’s bank pays the forfeiter

CONCLUSION:

India Factoring strongly believes that a client must get into the depth of reputable factors on the latter’s terms regarding each type of factoring. To ensure lower risks and less fee amounts must ensure strong and punctual payment data from the past. India Factoring helps various businesses to pay their salaries on time, which boosts their morale. It also helps pay their suppliers on time. This enhances their reputation and helps them get good deals.