Export Factoring Glossary: Key Terms Explained

This glossary defines the fifteen terms an exporter is most likely to meet when evaluating export factoring, in plain language, with each definition written to stand on its own. For how a deal moves from invoice to cash, see export factoring in India.

Key facts

• Export factoring is a sale (assignment) of receivables; India's Factoring Regulation Act, 2011 defines factoring business as acquiring receivables by assignment for collection or financing.
• Recourse and non-recourse differ in who bears the loss if an eligible buyer fails to pay for credit reasons.
• A commercial dispute over the goods or services is not a credit event.
• Any advance is set after credit review and under the facility terms.

Export factoring

The sale of an exporter's unpaid overseas invoices to a finance provider in exchange for an upfront cash advance, with the balance released, less charges, once the overseas buyer pays. An advance can be made against an approved invoice, subject to credit approval and the facility terms, rather than the exporter waiting for the buyer's due date.

Recourse factoring

A structure in which, if the overseas buyer fails to pay, the finance provider can require the exporter to refund the advance or make good the shortfall. The exporter still carries the ultimate credit risk on the buyer, so recourse factoring mainly solves a cash-flow timing problem.

Non-recourse factoring

A structure in which, on an eligible invoice, the finance provider rather than the exporter absorbs the loss if the buyer fails to pay because of insolvency or protracted default, subject to the facility terms. It is assessed buyer by buyer and often invoice by invoice, and it does not cover a genuine commercial dispute.

Two-factor factoring

An export factoring structure that uses two factors, an export factor in the exporter's country and an import factor in the buyer's country, so that credit assessment and collection are handled locally on each side. Not every export factoring deal uses this structure.

Single-factor (direct) factoring

A structure in which one finance provider deals directly with the exporter and the overseas buyer, without a second factor in the buyer's country. It is simpler to administer and suits providers with direct visibility of the buyer.

Forfaiting

The discounted, without-recourse purchase of a single, usually longer-dated trade receivable, often evidenced by a bill of exchange, promissory note or letter of credit. It is a transaction per receivable, whereas factoring is typically an ongoing, revolving facility.

Forfaiting vs factoring

Forfaiting generally covers one larger, longer-dated receivable without recourse; factoring typically covers a flow of shorter-dated open-account invoices, with or without recourse. IFSCA's Finance Company Regulations list both "factoring and forfaiting of receivables" as permitted core activities.

Open account

A trade arrangement in which the exporter ships goods or delivers services and invoices the buyer for payment at a later date, with no letter of credit or other bank payment instrument. Export factoring is built to serve open-account sales.

Notice of Assignment (NOA)

A formal notice to the overseas buyer stating that the exporter has assigned the receivable to the finance provider and that payment should be made to the provider's account. It is routine in disclosed factoring. See Notice of Assignment explained.

Disclosed (notified) factoring

A structure in which the buyer is formally told, through a Notice of Assignment, that the receivable has been sold and where to pay.

Undisclosed (non-notified) factoring

A structure in which the buyer is not told and keeps paying the exporter's usual collection account. Whether it is available depends on the facility and the legal position in the relevant jurisdiction.

Buyer credit limit

The maximum exposure a finance provider sets on a particular overseas buyer, based on credit information, trade references and payment history. Invoices are funded up to that limit, and a limit can be reviewed, reduced or withdrawn. See buyer credit limits explained.

Advance rate

The percentage of an invoice's face value released upfront on an eligible invoice, with the balance, less charges, released once the buyer pays. Whether and how much is advanced is set after credit review and under the facility terms; this glossary gives no percentage.

Credit insurance (trade credit insurance)

Insurance that, where it is in place, indemnifies a percentage of an insured loss arising from a buyer's insolvency or protracted default, subject to the policy's own terms, exclusions and claims process. The percentage is set in the policy; it is not the full invoice value in every case. ECGC's Shipments (Comprehensive Risks) policy, for example, states a 90% percentage of cover for exporters whose anticipated annual export turnover is above Rs 5 crore and whose projected premium is under Rs 20 lakh. See export credit insurance vs factoring.

Commercial dispute risk

A disagreement over whether the goods or services were delivered as contracted, such as short shipment, a quality claim or late delivery. Non-recourse treatment and credit insurance address buyer credit risk; they generally do not cover a genuine commercial dispute, which is why documentation at shipment matters.

Frequently asked questions

What is the difference between recourse and non-recourse factoring?

In recourse factoring the exporter must refund the advance if the buyer does not pay; in non-recourse factoring, on an eligible invoice, the provider bears the credit loss. Neither covers a commercial dispute.

What is a Notice of Assignment?

It is the notice that tells the buyer a receivable has been assigned to the finance provider and where to pay. See the glossary entry and the dedicated explainer page.

Is factoring the same as forfaiting?

No. Forfaiting usually covers a single longer-dated receivable without recourse; factoring typically covers a revolving flow of shorter-dated open-account invoices.

What is an advance rate?

It is the share of an invoice's value paid upfront. It is set after credit review and under the facility terms.

Sources

• IFSCA (Finance Company) Regulations, 2021, as amended up to 1 July 2022: ifsca.gov.in.
• RBI, Frequently Asked Questions on NBFCs (Factoring Regulation Act, 2011): rbi.org.in.
• ECGC, Shipments (Comprehensive Risks) policy product sheet: ecgc.in.