What is Forfaiting
“Forfaiting” is the term generally used to denote the purchase of obligations falling due at a fixed future date, arising from deliveries of goods and services-mostly export transactions-without recourse to any previous holder of the obligation. The world comes from the French “a forfait” and thus conveys the idea of surrendering right, which is of fundamental importance in Forfaiting.
The obligations are normally evidenced by freely negotiable debt instruments- Bills of Exchange, Promissory Notes, Letters of Credit or Receivables and usually guaranteed by an acceptable bank in the Importer’s country. These obligations or trade receivables are predominantly purchased from an exporter on a without recourse basis at a predetermined rate of discount.
The discounting of the trade receivables will take place shortly after shipment of the relevant goods under the supply contract, irrespective of the credit period which has been granted to the importer, thus providing the exporter with enchanted cash flow on a without recourse basis, whilst the importer receives the credit period agreed under the supply contract. Thus, Forfaiting allows the exporter to collect the total discounted proceeds on delivery without any risk of future non-payment by their buyer.
The financing term for the Forfaiting transaction mainly depends on Buyer’s Status, Size of the Contract, Country Risk, Financial Standing of the guarantor Bank or Government / Institution supporting the buyer’s obligation.