A discussion with Zeyno Davutoglu, Head of Bank Relations & Supply Chain Finance at Nexent Bank, and Kheng Leong Lee, Advisory Principal at KAPPS Consulting.
Factoring and forfaiting are both trade finance tools that help businesses unlock cash from their receivables – but they serve very different purposes, suit different transaction types, and carry different risk profiles. In this expert Q&A, Kheng Leong Lee and Zeyno Davutoglu break down the fundamentals, compare the mechanics, and offer a practical framework for businesses trying to decide which tool is right for them.
Understanding the fundamentals
Let’s start with the basics. Can you explain both factoring and forfaiting in simple terms? What are the core differences in how they work?
Kheng Leong: Factoring is the purchase – or assignment – of accounts receivable from the seller of goods and services. The factor provides an advance, credit protection and collection and receivable management services. Factoring can be provided with or without recourse to the seller, and it works for both domestic and export transactions.
Zeyno: Forfaiting is without-recourse purchase of future payment obligations, represented by negotiable or transferable financial instruments, at a discount or at face value in exchange for a financing charge. The key word is ‘without recourse’ – once the transaction is complete, the seller is no longer exposed to the buyer’s payment risk, subject to the transaction documents being valid and free from dispute, fraud or breach.
What are the key structural differences between factoring and forfaiting that practitioners should understand?
Kheng Leong: Factoring is primarily suited to companies selling on open account, with credit terms of no more than 180 days. Longer tenors are generally not factorable. The legal instrument used is the invoice, with no negotiable instrument required.
Factoring is a recurrent service: companies submit invoices on a continuous basis, and the values can be quite low depending on the factor’s systems. Financing is typically advanced at 80% to 90% of invoice value, based on the dilution rate.
Zeyno: Forfaiting is a financing solution designed for one-off export receivables, typically involving large international transactions of higher-value goods such as commodities, capital equipment, machinery, or infrastructure. These transactions are backed by transferable and negotiable instruments – such as letters of credit, promissory notes, or bills of exchange – with medium- to long-term maturities, generally ranging from six months to seven years. Forfaiting is always conducted on a non-recourse basis, meaning the exporter is fully protected from credit, political, and transfer risks. The financing is provided for 100% of the nominal value of the negotiable instrument.
Ideal use cases
What type of business, industry, or transaction is best suited for factoring versus forfaiting?
Kheng Leong: Micro, small, medium and large enterprises engaged in manufacturing, services, and distribution – both domestic and export – are well-suited to factoring. Capital goods, however, are typically not suitable.
Zeyno: Medium and large enterprises engaged in international sales are well-suited to forfaiting. Continuity of sales is not required, as each transaction is managed independently by the forfaiter. Because of the larger transaction amounts, longer tenors, and the non-recourse structure, forfaiters are generally more selective about the risks they take on.
Can you each share a real-world example (anonymised, if needed) that illustrates when one tool was clearly the right choice over the other?
Kheng Leong: A garment manufacturer exporting on open account to the same importer annually, with 90-day credit terms, is a classic factoring case. The transactions are recurring, the instrument is an invoice, and the credit terms are well within the 180-day threshold.
Zeyno: By contrast, a company exporting machinery with payment terms structured around an avalised bill of exchange with a one-year maturity is a clear forfaiting case. The instrument is negotiable, the tenor exceeds 180 days, the goods are capital in nature, and the transaction is one-off rather than recurring.
Read: ‘The evolution of factoring: Practices, techniques, and technology‘
Practical considerations
How do the costs and fee structures compare? How should businesses evaluate whether the cost difference is justified?
Kheng Leong: In factoring, there are two main fees. The first is a service fee, which ranges from 0.5% to 1% of invoice value. This covers credit protection (for non-recourse factoring) and collection and receivable management services – the fee is lower for recourse factoring.
The second is a discount charge for the advance taken. This can be structured in two types: either discounted upfront (e.g., if the discount rate is 2% on a USD 1,000 invoice, the seller receives USD 980 immediately) or charged based on the outstanding advance balance.
Zeyno: In forfaiting, the primary cost is a discount charge calculated on 100% of the nominal value of the negotiable instrument (such as a bill of exchange or promissory note). For example, if a bill of exchange has a face value of USD 1 million and a one-year maturity, the discount charge – which may be fixed or floating (e.g. SOFR plus a margin) – is applied to the full USD 1 million. For shorter tenors, a simple discount method is common; for longer maturities, Net Present Value (NPV) calculations may be used. There are typically no additional fees.
When evaluating whether the cost difference is justified, businesses should consider three factors:
- The total cost of financing, including any ancillary fees in comparable products;
- The value of risk transfer, since forfaiting is always without recourse, fully shifting credit, political, and transfer risk to the forfaiter;
- The simplicity and transparency of forfaiting’s fee structure versus the dual-charge model in factoring.
How do timelines compare from initial enquiry to receiving funds?
Kheng Leong: Factoring onboarding timelines depend on the complexity of each case and range from a few days to a few weeks. For simpler cases, many factors have developed programme approval processes – in some cases, approval can come within a single day.
Zeyno: In forfaiting, the timeline depends primarily on the nature of the underlying risk and the structure of the financial instrument:
- Bank-avalised instruments:
When the receivable is supported by a negotiable instrument avalised (confirmed/guaranteed) by a reputable bank, the transaction can typically be finalised within one business day (T+1) after all required documentation is submitted and verified. This expedited process is possible because the bank’s guarantee substantially reduces credit risk for the forfaiter. - Corporate risk instruments:
If the instrument relies solely on the corporate’s credit, the forfaiter must undertake a comprehensive credit assessment. This can extend the timeline to several days or even weeks, depending on the transaction’s complexity and the corporate’s credit profile. - Market practice:
In most cases, forfaiting transactions are structured with avalised instruments or letters of credit to facilitate prompt execution and minimise risk.
To move efficiently, businesses should ensure documentation is complete and accurate, structure transactions with bank-avalised instruments or letters of credit wherever possible and engage early with both the forfaiter and the relevant banks to clarify requirements and approval processes.
What are the documentation and administrative requirements for each?
Kheng Leong: Before the start of factoring, the client has to sign a factoring agreement with the factor. Thereafter, for domestic factoring, the key documents are invoices and delivery orders. For export factoring, additional documents include bills of lading and goods receipt notes (GRN), depending on the Incoterm® rule used. With digitalisation, many of these can be submitted electronically. Where factoring is notified, the seller informs the buyer that the invoices have been assigned to the factor. Factors also use risk analytics tools to mitigate fraud, dilution, set-off, and non-payment risk.
There are two main structures for export factoring: two-factor export factoring (via FCI), where the import factor manages risk and collections in the buyer’s country; and direct export factoring, where the factor works with credit insurance and relies on its own network for collection.
Zeyno: Forfaiting documentation required for a forfaiting transaction may vary depending on the specific financial instrument utilised. However, the following documents are generally considered essential:
- Original negotiable instrument: The original instrument (such as a promissory note, bill of exchange, or letter of credit) must be legally assigned to the forfaiter, thereby transferring all rights and obligations associated with the receivable.
- Shipping documentation: A copy of the bill of lading or equivalent shipping document is required to substantiate the physical movement of goods and to evidence fulfilment of contractual obligations.
- Commercial invoice: A copy of the invoice confirming the underlying commercial transaction and detailing the goods or services supplied.
- Bank acknowledgement: A formal statement from the avalising or letter of credit issuing bank is necessary. This document must confirm the authenticity of signatures on the negotiable instrument, acknowledge the assignment of the instrument to the forfaiter, and explicitly state that payment will be made directly to the assignee on the specified due date.
Each of these documents serves a critical function in establishing the legitimacy of the receivable, ensuring the enforceability of payment, and mitigating legal and operational risks inherent in forfaiting transactions.
Risks and limitations
What are the main risks, downsides, or limitations of each tool that businesses should be aware of?
Kheng Leong: With recourse factoring, the seller remains exposed if the buyer fails to pay – including risks arising from disputes, contra or set off. Non-recourse factoring transfers the buyer’s credit default risk to the factor, but the seller still bears risk related to disputes, contra and set off. These are trade risks that factoring cannot fully insulate against.
Zeyno: Forfaiting as a fully non-recourse structure, provides the clearest risk protection. Once the transaction is finalised with the forfaiter, the seller is not subject to further recourse – including credit, political, and transfer risk. The trade-off is selectivity: forfaiters are careful about which risks they accept, and not all transactions or counterparties will qualify.
When would you advise a business not to use factoring? When would you advise against forfaiting?
Kheng Leong: Rather than hard rules, there are a series of diagnostic questions that will naturally point a business in the right direction:
- Are they selling capital goods? If so, forfaiting is more appropriate. Factoring is generally not suited to capital equipment.
- What instrument is used? If only an invoice is involved, factoring is the option. Bills of exchange or promissory notes point to forfaiting.
- What are the credit terms? Under 180 days favours factoring; over 180 days, forfaiting is more suitable
- Is the transaction value large (typically USD 500,000 or more)? Forfaiting is likely the better fit.
- Is country or political risk a concern? Factoring generally does not cover country risk (though some factors can arrange credit insurance). Forfaiting covers it as standard.
Zeyno: Because the requirements of both products are so different, it is relatively straightforward for a business to choose once the transaction is properly characterised. The comparison table in Section 6 sets out the key criteria side-by-side.
Read: ‘Open account trade finance products | Part 2′
The decision framework
What are the most important questions a business should ask when deciding between the two tools? What decision criteria would you recommend?
Kheng Leong: Companies can use the following table to decide whether they should use factoring or forfaiting:
| Factoring | Forfaiting | |
| Document use | ||
| Invoice | Y | |
| Bill of exchange | Y | |
| Individual transaction size | ||
| Larger (typically > USD 500,000) | Y | |
| Small | Y | |
| Types of goods | ||
| Capital goods | Y | |
| Non-capital goods | Y | |
| Transaction frequency | ||
| Recurrent | Y | |
| Non-recurrent transaction | Y | |
| Recourse | ||
| With recourse | Y | |
| Without recourse | Y | Y |
| Country risk coverage | Y | |
| Export trade | Y | Y |
| Domestic trade | Y |
*Factoring can be without recourse, but forfaiting is always without recourse.
Are there situations where a company might use both factoring and forfaiting?
Kheng Leong: Yes. If a bank offers both products, it can tailor a solution to the client’s needs depending on the transaction – factoring for one type of trade flow, forfaiting for another.
Zeyno: We see this quite often in practice. A company with both domestic and international sales, or international sales that have a recurring open account element alongside new customers using letters of credit, may well use both. The two products aren’t in competition – they address genuinely different financing situations.
What’s the biggest misconception you encounter when businesses compare these two financing tools?
Kheng Leong: The most persistent misconception about factoring is that it’s an expensive last resort used by SMEs in financial difficulty. Factoring is used by successful, growing and profitable companies – from micro-enterprises through to large corporations. Factoring is a facility that grows with sales: the more a company sells, the more financing it can access. In fact, companies tend to reduce their use of factoring when they stop growing, not when they’re in trouble. Large corporations also use factoring strategically – under IFRS 9, a non-recourse factoring may allow receivables to be removed from the balance sheet, subject to the applicable accounting treatment being confirmed with auditors.
Zeyno: Because the two products are so structurally different, once they’re clearly explained, businesses rarely confuse them. The eligibility criteria, instruments, and tenors are distinct enough that the right tool becomes fairly obvious once the transaction is properly characterised.
Comparison table
| . | Factoring | Forfaiting |
|---|---|---|
| Definition | Purchase/assignment of receivables with or without recourse | Without-recourse purchase of future payment obligations via negotiable instruments, at a discount or face value. |
| Typical transaction size | USD 1,000 upwards – depends on factor’s system | Typically USD 500,000 and above |
| Payment terms/tenor | Typically up to 180 days | 6 months to 7 years |
| Geographic scope | FCI international factoring (countries covered by FCI); insurance-backed international factoring (countries covered by the credit insurance companies) | International trade only |
| Ideal business types/industries | Manufacturing, service, or distribution | Capital goods, machinery, infrastructure |
| Business size/maturity | MSME to large corporation | Medium to large enterprises |
| Transaction frequency | Recurrent – invoices can be submitted daily | One-off per transaction |
| Document used | Invoice only | Negotiable instrument, bill of exchange, promissory notes, or letters of credit |
| Documentation requirements | Domestic – invoice, delivery order Export – invoice, Bill of lading, GRN and other documents required in the incoterm of the transaction. | Negotiable instrument, bill of lading, commercial invoice, bank acknowledgement |
| Recourse/non-recourse | Both recourse and non-recourse | Always without recourse |
| Guarantees/security required | Usually guarantee from company promoters | Bank aval or letter of credit typically required |
| Advance payment | 80-90% of invoice value | 100% of nominal value (minus discount) |
| Risk coverage | Credit risk may or may not be covered depending on agreement | All risks covered by forfaiter – including credit, political, and transfer risk |
| Country risk | Not typically covered – factor can arrange credit insurance | Covered as standard |
| Typical cost/fee structure | Service fee 0.5% – 1% of invoice value; interest charge on advance (per annum, varies by factor and country) | Discount charge on 100% financing; simple fee structure; no ongoing management required |
| Key benefits | Domestic: credit protection, advance, collection & receivable management. Export: ability to sell on open account, credit protection, advance, collection and receivable management | Full risk transfer; 100% financing; simple fee structure; no ongoing management required |
| Main limitations | Notification essential to prevent fraud but many buyers impose non-assignment clauses in purchase orders | Forfaiters are selective – not all transactions or counterparties will qualify |
| Best suited for | Growing MSMEs needing financing that scales with sales; large corporations leveraging IFRS 9 balance sheet treatment | Exporters with high-value, longer-term, one-off contracts for capital goods |
The Academy now offers the Certified Factoring Professional (CFaP) certification for practitioners keen to develop a solid understanding of factoring fundamentals, international trade finance, supply chain financing, legal and accounting frameworks, risk mitigation, and selling skills.
