An Introduction to Forfaiting

Summary

Forfaiting is a trade finance solution that allows exporters to receive immediate cash after shipment by selling their receivables at a discount to forfaiters. This process transfers the credit risk to the forfaiter while providing importers with extended credit terms. Forfaiting is most commonly used for transactions exceeding $100,000 and can involve contract terms from 180 days to seven years. It offers exporters several advantages, such as eliminating non-payment risk and enabling sales to high-risk markets. The process is fast, with minimal documentation, and can be combined with export credit agencies for additional security.

Takeaways

• 😀 Forfaiting is a trade finance option that allows exporters to receive immediate cash after shipment by selling accounts receivable at a discount to a forfaiter.
• 😀 This financing option helps exporters improve cash flow by transferring credit risk to the forfaiter while offering importers extended credit terms.
• 😀 Forfaiting is commonly used for transactions with maturities between 180 days and seven years, with a focus on large and medium-sized corporations exporting capital goods and commodities.
• 😀 The exporter sells receivables at a discounted price to a forfaiter, which could be a specialized firm or a department within an international bank.
• 😀 The exporter should approach the forfaiter early in the sales process to incorporate forfaiting costs into the sale price during negotiations with the importer.
• 😀 Typical details for a forfaiting transaction include the buyer's name, type of goods, contract duration, payment schedule, and evidence of debt.
• 😀 Once the discounted price is agreed upon, the exporter signs a commitment letter, and a financing proposal is made for the importer, factoring in the forfaiting cost.
• 😀 If the proposal is accepted by the importer, a payment guarantee from a bank in the importer's country may be required before shipment.
• 😀 The exporter ships the goods, endorses negotiable instruments like bills of exchange, and receives immediate payment from the forfaiter.
• 😀 Forfaiting offers 100% financing, eliminates payment risk for the exporter, and provides opportunities to sell to high-risk markets.
• 😀 Forfaiting can be used alongside export credit agencies' official support, such as from the U.S. Export-Import Bank, and works with common negotiable instruments in international trade.

Q & A

What is forfaiting in trade finance?

Forfaiting is a trade finance option where exporters receive immediate cash after shipment by selling their account receivables at a discount to a forfaiter, typically a specialized firm or an international bank.

How does forfaiting benefit exporters?

Forfaiting allows exporters to improve cash flow by converting credit-based sales into immediate cash payments, thus eliminating the credit risk associated with foreign buyers and extending credit terms.

What kind of transactions typically use forfaiting?

Forfaiting is mainly used for transactions exceeding $100,000, especially by large and medium-sized corporations that export capital goods and commodities.

What is the role of the forfaiter in the forfaiting process?

The forfaiter purchases the exporter’s receivables at a discounted price and assumes the responsibility of collecting payments from the foreign buyer, thereby eliminating the exporter’s risk.

What type of risks does forfaiting eliminate for exporters?

Forfaiting eliminates virtually all risk of non-payment by the exporter, as the forfaiter takes on the responsibility of collecting payments from the buyer.

What is the typical maturity period for forfaiting transactions?

The maturity period for forfaiting transactions usually ranges from 180 days to seven years, depending on the terms agreed upon between the exporter and importer.

Why is it important for exporters to approach a forfaiter early in the process?

Approaching a forfaiter early allows the exporter to build the forfaiting cost into the sale price, ensuring a smooth negotiation with the importer.

How does an exporter initiate a forfaiting transaction?

The exporter presents the details of the proposed sale and financing to the forfaiter, including information such as the buyer’s name, goods being sold, contract duration, payment schedule, and evidence of debt.

What types of documents are typically involved in forfaiting transactions?

Forfaiting transactions usually involve negotiable instruments such as bills of exchange, promissory notes, or letters of credit.

How does forfaiting work when an exporter ships goods to the importer?

Once the sales contract is signed, the exporter ships the goods to the importer and endorses the negotiable instruments in favor of the forfaiter, who then pays the exporter the agreed-upon amount in cash.