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Forfaiting Finance

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 guarantee letter.

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 for itself.

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 discounting bank);

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 .

 
   

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