What is Forfaiting?
Forfaiting is the purchase of an exporter's trade receivables at
a discount to face value "without recourse" to the exporter.
This discount will imply a fixed rate of interest to the
maturity of the importer's obligation. Once the goods have been
shipped and the necessary satisfactory documentation obtained
(such as shipping documents and commercial invoices), Worldwide
Company Corporate Finance Brokers
Banking Partners are able to purchase the trade receivables
(i.e. the importer's debt obligations) and so assume the
responsibility for the debts. Thus the exporter is free of
credit, transfer, and political risks, and can then concentrate
all his efforts on new business.
The trade receivables are usually evidenced by either deferred
payments due under an Irrevocable deferred payment Letter of
Credit or by negotiable instruments such as Bills of Exchange
(accepted by the buyer) or Promissory Notes (issued by the
buyer). Repayment is generally made against presentation of a
series of such bills or notes maturing throughout the credit
term, or automatically on the deferred payment dates of the
Letter of Credit. It is usual to have these instruments
guaranteed by the buyer's bank. This guarantee can simply be
achieved by the process of adding an aval or in a separate
The risks which now no longer concern the exporter are borne by
Worldwide Company Corporate Finance Brokers Banking Partners which arranges to receive repayment
from the overseas buyer and / or the buyer's bank (the
guarantor). The buyer will benefit from the agreed period of
credit together with the pre-agreed repayment dates and fixed
interest rate on the outstanding amount of the debt.
Forfaiting offers the exporter a range of advantages that are
set out below. The main advantage is that cash is received
shortly after delivery of the goods and the lengthy, intricate
procedures and paperwork associated with state-insured buyer-
and supplier-credits may be avoided.
How it works:
The forfaiting market developed to provide a solution to bridge
the gap between the exporter of capital goods who would not or
could not deal on open account, and the importer who desired to
defer his payment until the capital equipment could begin to pay
In its simplest form, a forfaiting operation involves four
parties; the exporter, the importer, the importer's bank (the
guarantor), and the discounting bank (the forfaiter).
The problems to be overcome are:
the importer is purchasing machinery that he is unwilling or
unable to pay for in cash until that machinery begins to
generate income and
the exporter wants immediate payment in full in order to meet
his on-going business commitments.
The forfaiting solution is as follows:
commercial contracts are negotiated subject to finance;
the importer arranges for an Irrevocable Letter of Credit to be
issued or for a series of Promissory Notes or Bills of Exchange
to be drawn in favour of the exporter which the importer
arranges to have guaranteed by his local bank;
the exporter contacts the discounting bank (the forfaiter) for a
rate of discount which is then agreed;
the goods are shipped;
the notes or bills are sent with shipping documentation and
invoices to the discounting bank via the exporter (who endorses
the notes or bills "without recourse" to the order of the
the discounting bank purchases the guaranteed notes or bills
from the exporter at the agreed rate.
The number of notes or bills, their maturities, and the
discounting rate will depend on the size of the commercial
contract, the nature of the product and the credit standing of
the importer's country and the guaranteeing bank.
The end result is that the exporter receives payment in full
immediately after shipping (against presentation of satisfactory
documentation to the forfaiter); the importer gets his goods and
can pay for them in installments over time; and the forfaiter has
title to an asset which he may retain .