What is Forfaiting? Forfaiting is a mechanism to finance international trade under which the exporter (seller) gets his Drafts or Bills of Exchange pre-accepted by the importer (buyer) and further availed by the importer's Bank, and gets the same purchased by the Forfaiter.
Forfaiting is a method of trade financing that allows exporters to obtain cash and be free of all risks by selling their medium term receivables on a "without recourse" basis. It is a flexible product and can be modified to suit the exporter’s particular requirements, enabling them to receive a sum payment shortly after delivery. Forfaiting financing can be an alternative to export credit or insurance cover, especially for those transactions in which the export credit agency is not open to a particular country or bank. Where export credit is available, forfaiting can be used to finance the uncovered portion.
Main Characteristics of Forfaiting
Forfaiting is a method of trade financing that allows exporters to obtain cash and be free of all risks by selling their medium term receivables on a "without recourse" basis. It is a flexible product and can be modified to suit the exporter’s particular requirements, enabling them to receive a sum payment shortly after delivery. Forfaiting financing can be an alternative to export credit or insurance cover, especially for those transactions in which the export credit agency is not open to a particular country or bank. Where export credit is available, forfaiting can be used to finance the uncovered portion.
Main Characteristics of Forfaiting
- Debt is normally evidenced by bills of exchange, promissory notes or a letter of credit
- The buyer's obligation is usually supported by a local bank guarantee
- Documentation is very simple, requiring evidence of underlying transaction (copies of shipping documents) and certain confirmations from obligor/guaranteeing bank
- Transactions can be concluded on a fixed or floating interest rate basis
- Exporter receives funds upon presentation of necessary documents, shortly after shipment
- Removed from political, transfer and commercial risk
- Protected from the risk of interest rate increases and exchange rate fluctuations
- No deductible as required in an insurance policy
- Ability to provide vendor financing, making products more attractive
- Ability to do business in riskier countries
- Forfaiting converts a credit- based transaction into a cash transaction
- Balance sheet is not burdened by accounts receivables, bank loans or contingent liabilities
- Commitments can be issued within hours/days depending on country
- Documentation is usually concise and straightforward
- Relieves the exporter from administration and collection problems.
- No restrictions on origin of export.