What Is the Difference Between Factoring and Forfaiting?
Factoring covers short-term domestic invoices (30-90 day terms). Forfaiting covers medium-to-long-term export receivables (180 days to 7 years), typically backed by letters of credit or bank guarantees. Forfaiting is used for large capital goods exports. Most UK SMEs use factoring, not forfaiting.
Why This Matters
Most UK businesses invoicing domestically on 30-90 day terms will never need forfaiting, but understanding the difference prevents confusion when exploring finance options. Factoring is the workhorse: providers like Close Brothers or Bibby Financial Services advance up to 90% against your invoices within 24 hours, then collect payment from your customers. Forfaiting is an entirely separate export finance tool for businesses selling capital equipment, infrastructure, or commodities overseas on extended payment terms of six months to seven years. A Birmingham machinery manufacturer exporting to Latin America on 180-day terms would use forfaiting; a Leeds design agency invoicing UK clients on 60-day terms uses factoring. The key distinction is tenor and structure. Factoring is recourse-based (you remain liable if your customer defaults) or non-recourse (factor assumes credit risk for a premium). Forfaiting is always without recourse, but requires the receivable to be backed by a bank guarantee, letter of credit, or sovereign obligation. UK SMEs with annual turnover under £5m almost exclusively use factoring through mainstream providers. Forfaiting typically requires specialist intermediaries and deal sizes upwards of £250,000, making it irrelevant for the majority of invoice finance searches.
Key Points
- Factoring handles short-term domestic invoices (typically 30-90 days). Forfaiting handles medium-to-long-term export receivables (180 days to 7 years), usually for capital goods sales.
- Forfaiting requires third-party security: a letter of credit from the buyer's bank, a bank guarantee, or a sovereign guarantee. Factoring relies on the creditworthiness of your commercial customer alone.
- Forfaiting is always non-recourse (you have no liability if the overseas buyer defaults). Factoring can be recourse (you repay if customer doesn't pay) or non-recourse (factor takes the risk).
- UK factoring providers (Close Brothers, Aldermore, Ultimate Finance, Bibby Financial Services) advance 70-90% of invoice value within 24 hours. Forfaiting involves purchasing the entire receivable at a discount, typically arranged through specialist intermediaries, not high-street factors.
- Factoring is used by thousands of UK SMEs across all sectors, with minimum turnovers as low as £50,000. Forfaiting is niche, used by exporters of machinery, aircraft, infrastructure projects, and commodities, typically with individual transaction values exceeding £250,000.
- Forfaiting rates reflect the country risk and tenor: a five-year receivable backed by an emerging market bank guarantee might cost 6-12% per annum. Factoring discount fees typically run 0.5-3% per invoice plus a service charge of 0.5-2% of turnover.
- If you're exporting on extended terms and the overseas buyer's bank will issue a letter of credit or guarantee, forfaiting removes all payment risk and frees up capital. Without that bank backing, you're looking at export credit insurance or factoring, not forfaiting.
Real-World Example
A Coventry engineering firm wins a £900,000 contract to supply industrial machinery to a Turkish buyer on 360-day payment terms. The Turkish buyer's bank issues an irrevocable letter of credit guaranteeing payment in 12 months.
The Coventry firm arranges forfaiting through a specialist intermediary. The forfaiter purchases the letter of credit at a discount (say 8% for the 360-day period), advancing the firm approximately £828,000 upfront. The firm has no recourse exposure; the forfaiter collects directly from the Turkish bank in 12 months. If the same firm had instead invoiced a UK customer on 60-day terms, they would use factoring with Close Brothers or Aldermore, receiving 85% within 24 hours and the balance (minus fees) once the customer pays.
Common Pitfalls
- Assuming forfaiting is available for standard export invoices. Without a bank guarantee or letter of credit backing the receivable, forfaiting won't work. You need export factoring or credit insurance instead.
- Confusing forfaiting with export factoring. Export factoring (offered by Bibby Financial Services, Close Brothers, HSBC Invoice Finance) covers short-term export invoices without requiring bank guarantees, but typically on recourse terms or with credit insurance.
- Underestimating the cost and complexity of forfaiting. It's not a commodity product. You need specialist advisers, legal documentation, and the buyer's bank must agree to issue guarantees, adding weeks or months to the transaction timeline.
- Thinking forfaiting is cheaper than factoring because it's non-recourse. Forfaiting rates reflect country risk, currency risk, and long tenors. A 5% discount on a 180-day receivable annualises to over 10%, often higher than factoring costs for short-term domestic invoices.
What to Do Next
- If you invoice UK or EU businesses on 30-90 day terms, compare factoring quotes from Close Brothers, Aldermore, Bibby Financial Services, Ultimate Finance, or Secure Trust Bank via this site. Forfaiting is not relevant to your needs.
- If you export capital goods or project-related services on payment terms longer than 180 days, speak to your bank's trade finance desk or a specialist forfaiting intermediary (not a standard invoice finance broker) to assess whether the buyer can provide a letter of credit or bank guarantee.
- For exports on shorter terms (30-120 days) without bank guarantees, explore export factoring (available from Close Brothers, Bibby Financial Services, HSBC Invoice Finance) or standalone credit insurance to mitigate overseas buyer default risk.
Related Questions
Can I use factoring for export invoices?
Yes. Export factoring is available from Close Brothers, Bibby Financial Services, HSBC Invoice Finance, and others. It works like domestic factoring but may require credit insurance on overseas buyers or be offered on recourse terms. Advance rates can be lower (70-85%) and you may need minimum export turnovers of £100,000 to £250,000 depending on the provider.
What is a letter of credit and why does forfaiting need one?
A letter of credit is a bank's written promise to pay you if you meet the terms of an export contract. Forfaiting needs this (or a bank guarantee) because the forfaiter is buying the receivable without recourse to you. They rely entirely on the creditworthiness of the issuing bank, not your customer. Without it, there's no security for the forfaiter to purchase the debt.
Is forfaiting regulated by the FCA?
No. Forfaiting is a commercial finance transaction between businesses, outside the FCA's perimeter. Like most B2B invoice finance, there is no Financial Ombudsman recourse. You rely on contract law and the reputation of the forfaiting intermediary or bank arranging the deal. Always use established institutions and take independent legal advice on documentation.
Director, Market Invoice
Oliver leads Market Invoice's editorial and comparison research. With a background in UK commercial finance, he oversees provider analysis, rate verification, and industry reporting across all verticals.
Last reviewed: 6 April 2026