Forfaiting is a form of trade and supply chain financing. It involves the purchase of future payment obligations on a “without recourse” basis. Forfaiting can be applied to a wide range of trade related and even purely financial receivables and payment instruments.
Forfaiting is a means of financing used by exporters that enables them to receive cash immediately by selling their medium-term receivables (the amount an importer owes the exporter) at a discount, and eliminate risk by making the sale without recourse, meaning the exporter has no liability regarding possible default by the importer on paying the receivables. The forfaiter is the individual or entity that purchases the receivables, so the importer is then obligated to pay the receivables amount to the forfaiter. A forfaiter is typically a bank or a financial firm that specializes in export financing.
Advantages of Forfaiting: Forfaiting eliminates all risk of the exporter not receiving payment, including credit risk and transfer risk, as well as risks posed by foreign exchange rate or interest rate changes.
By transforming a credit-based sale into a cash transaction, forfaiting simplifies the transaction, providing immediate cash flow and eliminating collection costs for the seller and the need to carry the accounts receivables on its balance sheet as contingent liabilities.
Forfaiting is flexible and can be tailor-made to suit the needs of the exporter and adapted to a variety of international transactions. It can be utilized in place of credit or insurance coverage for a sale. It is helpful in situations where a country or a specific bank within the country does not have access to an export credit agency, allowing an exporter to transact business with buyers in countries with high levels of political risk.
Forfaiting is a means of financing used by exporters that enables them to receive cash immediately by selling their medium-term receivables (the amount an importer owes the exporter) at a discount, and eliminate risk by making the sale without recourse, meaning the exporter has no liability regarding possible default by the importer on paying the receivables. The forfaiter is the individual or entity that purchases the receivables, so the importer is then obligated to pay the receivables amount to the forfaiter. A forfaiter is typically a bank or a financial firm that specializes in export financing.
Advantages of Forfaiting: Forfaiting eliminates all risk of the exporter not receiving payment, including credit risk and transfer risk, as well as risks posed by foreign exchange rate or interest rate changes.
By transforming a credit-based sale into a cash transaction, forfaiting simplifies the transaction, providing immediate cash flow and eliminating collection costs for the seller and the need to carry the accounts receivables on its balance sheet as contingent liabilities.
Forfaiting is flexible and can be tailor-made to suit the needs of the exporter and adapted to a variety of international transactions. It can be utilized in place of credit or insurance coverage for a sale. It is helpful in situations where a country or a specific bank within the country does not have access to an export credit agency, allowing an exporter to transact business with buyers in countries with high levels of political risk.
