Factoring and forfeiting are terms used in sales regarding collecting money owed. They involve money owed to businesses, known as accounts receivable accounts.
Factoring is a technique used when a business sells its receivables to a factoring house at a discounted rate. The factoring house pays the business a percentage of the receivables in advance and collects the money from the accounts. After all money is received, the factoring house pays the business the rest of the money, keeping the predetermined percentage as compensation for its financial services. Factoring is basically the same idea as getting a loan. Forfeiting involves actually selling accounts receivables. A bank pays the entire amount of the receivables minus a service fee. The business never deals with the sold accounts after this point.
Factoring uses current receivables, those due within 90 days or less. Forfeiting is based on long-term receivables; those due in 90 days or more.
Benefits and Costs
Factoring and forfeiting offer benefits for businesses. Businesses collect money owed to them immediately instead of waiting for payments to be made. These techniques are beneficial to businesses because they increase cash flow. They are not as profitable as keeping the receivables because fees must be paid to the lender for providing this service.