Export Finance Comparison: Factoring vs LC Discounting vs Forfaiting vs Bill Discounting

Why this comparison matters

Every export finance product does the same headline job — turn money tied up in a trade into cash you can use — but the mechanics, costs and best-fit situations are very different. Pick the wrong one and you pay too much, or the facility is not available for your buyer at all.

The single biggest driver is the buyer’s country: it decides whether factoring markets exist, whether LC discounting is viable, and how risk is priced. That is why the comparison below ends with a decision framework that starts with the buyer, not the product.

The four products at a glance

All four are legitimate working-capital tools. The differences below are what matter for pricing and eligibility.

Cost profile at a glance

The headline numbers sound different because the tenors differ — a factoring fee covers a 30–120 day collection, while LC discounting is an annual rate on a specific tenor. The right comparison is the all-in cost for your specific deal, not the sticker price.

Using products together

These products are not mutually exclusive. A typical export cycle layers them:

• Pre-shipment: packing credit funds production of the confirmed order.
• Shipment: the goods leave under the buyer’s payment terms or an LC.
• Post-shipment: factoring or LC discounting converts the shipped value into cash.
• Larger projects: forfaiting can refinance the medium-term tail after the short-term facility is paid.

Layering is standard practice — each product does its own job in the cycle, and using them together keeps working capital moving from order to collection.

Export factoring

Factoring sells your export invoices to a factor at a small discount. You get an advance of 70–90% of the invoice value in 24–48 hours, and the factor collects from the buyer. It needs no LC and no collateral beyond the invoices — but it depends on a functioning factoring market in the buyer’s country.

Best where coverage is broad (the trad matrix scores countries 0–100). See the full mechanics in our export factoring guide.

LC discounting

LC discounting advances funds against an irrevocable letter of credit before it matures. It is priced as an annual percentage over the tenor and is the standard choice where factoring coverage is thin but confirmed LC liquidity exists.

The LC’s issuing bank, not just the country, drives pricing. Read the full LC discounting guide for the process and a worked example.

Forfaiting

Forfaiting sells medium-term receivables — usually backed by LCs or bills of exchange with tenors of 1–5 years — without recourse. Once you sell the receivable, the risk moves off your books entirely. That is why it is the classic tool for capital goods, machinery and project exports where payment is spread over years.

It is typically slower and more structured than factoring, and it needs the underlying instruments to be bank-avaled or LC-backed to be saleable.

Bill discounting

Bill discounting advances cash against an accepted trade bill or invoice for a specific transaction, usually short-term. It is flexible and quick for single shipments, and does not need the buyer-country factoring infrastructure — but it relies on the bill being accepted and the debtor being creditworthy.

In India, MSME exporters also have TReDS, a regulated electronic platform for discounting receivables from large institutional buyers.

Which one should you choose?

• Need money before you ship to fund production? → Pre-shipment packing credit, not these four.
• Buyer’s country has broad factoring coverage and no LC? → Export factoring.
• Deal runs on an irrevocable LC and you want cash before maturity? → LC discounting.
• Capital goods or project sale with 1–5 year payment terms? → Forfaiting.
• One-off shipment with an accepted bill, no LC, thin local factoring? → Bill discounting.

When the buyer’s country decides it, run the check first — the trad financing matrix tells you which of factoring or LC discounting is available for 194 markets.

Frequently asked questions