Forfaiting

What is Forfaiting?

Forfaiting is a financial transaction that involves the sale of an exporter's receivables to a forfaiter. These receivables are usually in the form of promissory notes or bills of exchange from international trade transactions. The forfaiter, who is typically a bank or a finance company, purchases these receivables at a discounted price, providing the exporter with immediate cash. Forfaiting enables exporters to eliminate risks related to payment delays and defaults from their overseas buyers.

The Forfaiting Process

The forfaiting process starts when an exporter sells goods to an overseas buyer and agrees to receive payment via a series of deferred payments. The exporter then approaches a forfaiter and offers to sell these future payment claims. The forfaiter evaluates the creditworthiness of the buyer and the political and economic stability of the buyer's country. If satisfied, the forfaiter agrees to buy the receivables at a discount, giving the exporter upfront cash minus fees and interest for the risk undertaken.

Benefits of Forfaiting

Forfaiting offers numerous benefits to exporters. It provides immediate liquidity, as funds are secured upfront. By transferring the credit risk to the forfaiter, exporters are safeguarded against potential non-payment by the buyer. Additionally, forfaiting is a non-recourse finance option; this means that the exporter is not liable to repay the forfaiter if the overseas buyer fails to pay.

Forfaiting vs. Factoring

It's important not to confuse forfaiting with factoring. Although both involve the sale of receivables, forfaiting is typically used for international trade and deals with larger and longer-term receivables. In contrast, factoring is often used for domestic transactions and involves shorter-term receivables. Another key difference is that factoring may be with recourse, meaning the seller might have to buy back unpaid receivables, while forfaiting is always without recourse.

Key Considerations in Forfaiting

When considering forfaiting, an exporter should take into account the discount rate, which can impact the overall profitability of the trade deal. It's also essential to recognize that not all types of receivables may be eligible for forfaiting, mostly it is reserved for high-value transactions with reliable counterparties.

Conclusion

Forfaiting is an effective financial solution for exporters seeking to mitigate payment risks and improve cash flow. By selling their medium to long-term receivables at a discount, exporters can focus on growing their business without the worry of payment collection and political risks associated with international trade.