Definition

Factoring It is continuing legal relationship between a financial Institution (the Factor), and a business concern(the Client) selling goods or providing services to trade customers ,whereby the factor purchases the clients book debts either with or without recourse to the client

Forfeiting It is a mechanism of financing exports by discounting export receivables evidenced by Bills of Exchange or promissory notes with out recourse to the seller (exporter). Ie Forfeiting is the purchase of export receivables at a discounted price by paying cash. The buyer is known as forfeiter who undertakes all risks while collecting the receivables

% of finance provided to the client

-80% of the invoice amount is paid immediately by the factor . '- And the balance 20% is paid to the client by the factor on receipt of full invoice amount on the date of maturity from the customer

100% finance is provided (normally 100% finance is provided and discounting charges are paid separately)

Discounting/ commision charges

For making immediate payment Factor charges dicounting charges.This discount charges are comparable to bank interest rates in that it is calculated for the period between the date of advance payment by the factor to the client and the date of collection by the factor from the customer. tHESE ARE COLLECTED MONTHLY. For rendering services of collection and maintenance of sales Ledger factor charges 0.4to 1% on the invoice value. THIS SERVICE CHARGES IS COLLECTED AT THE TIME OF PURCHASE OF INVOICES BY THE FACTOR.

The cost of forfeiting finance is always at afixed rate of interest which is usually included in the face value of the bills/notes. (ie Discounting charges mostly at a fixed rated rate)

Transaction Instrument applicability Service

Done mainly on Domestic but also done on export transaction Done on the basis of sales Invoices done on whole turnover Debt collection, customer ledger maintenance, provide relevent advisory services to the client mainly associated with bok debts of manufacturingand trading Cos deals with trade debts Debts - short term in nature entire credit risk can be passed on to the factor factor is afacilitator Factor evaluates and invests No securities created backed by account receivables

Only for export transaction Bill of Exchangeor promissory notes Done for particular transaction. It is only the financial service - No other services

Other differences

Securitisation It is a process through which ill- liquid assets are transferred into more liquid form of assets and distributed to a broad range of investors in capital market. It is a process of transferring certain financial assets like receivables on loans, credit card balance, receivables from hire purchase, receivables underlease etc into securities and marketing those securities to raise finance. The process starts with a financial Institution called originator deciding to go for securitisation. The originator picks up apool of assets of homogeneous nature for secritisation (identification process) The selected assets (loans and other receivables)are transferred (normally sold )to SPV(or a trust). Originators gets the full money from SPV. SPV then converts this assets with the help of merchant bankers into marketable securities. Securities are sold to investors and SPV gets reimbursed out of this sale. The securities issued by SPV are stuctured in such away that the maturity of these securities will synchronise with the maturities of securitised loan/recevables. Redemption and payment of interest and principal on these securities are facilitated by the collection received by SPV from Obligors.

Fees received by Merchant bankers

mainly associated with Financial companies Deals with loans and receivables medium or long term in nature part of the credit risk can be absorbed by the originator by transferring the assets at a discount. spv & Merchant bankers are key facilitators investors merely invest Evaluation and process is done by SPV and Merchant bank securities -Pass thru and Pay thru are created backed by assets or mortgages.