Payment & trade finance

Factoring and forfaiting

Turning receivables from credit sales into cash before maturity by assigning them to a finance provider. Factoring is used for short-term, recurring invoice receivables, with or without recourse (in non-recourse factoring the factor takes the buyer’s default risk). Forfaiting is the non-recourse discounting of individual, usually larger and longer bank-backed claims such as accepted drafts under a letter of credit or avalised bills. Both ease the exporter’s working capital.

Related terms

Open account O/A

The seller ships the goods and sends the documents directly to the buyer, who pays the invoice on a due date (e.g. 30–90 days). It is the most favourable method for the buyer and the riskiest for the seller, who manages the credit risk through trade credit insurance, factoring or a standby letter of credit. It is standard in long, trusted relationships and in some markets such as intra-EU trade.

Usance (deferred-payment) letter of credit

A letter of credit under which payment falls due at a set time after complying presentation – for example 90 or 180 days after the bill of lading date. It finances the buyer, who can process and sell the goods before paying, while the seller can obtain cash early by having the bank discount the accepted claim (forfaiting). The interest for the usance period and the discount cost should be built into the price.

Trade credit insurance

Insurance of the seller’s receivables from credit sales against the buyer’s insolvency or protracted default (commercial risk) and against political risks such as war or transfer bans. The insurer sets a credit limit for each buyer and, after a loss, usually pays 85–95 % of the debt. Providers include export credit agencies such as Türk Eximbank and private insurers such as Allianz Trade, Coface and Atradius. A policy also makes bank financing easier and cheaper.

Explained in the trade handbook

Trade handbook