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What Is Forfaiting

Forfaiting is a form of international supply chain financing that involves the discount of future payment obligations on a without recourse basis. It can be applied to a wide range of trade receivables and financial instruments. Forfaiting provides 100% financing to sellers, removes risks, and allows sellers to offer credit while improving their cash flow. A forfaiter purchases discounted receivables from exporters and is responsible for collection from the importer's bank. This allows exporters to receive upfront cash payment while offering credit terms to importers.

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225 views10 pages

What Is Forfaiting

Forfaiting is a form of international supply chain financing that involves the discount of future payment obligations on a without recourse basis. It can be applied to a wide range of trade receivables and financial instruments. Forfaiting provides 100% financing to sellers, removes risks, and allows sellers to offer credit while improving their cash flow. A forfaiter purchases discounted receivables from exporters and is responsible for collection from the importer's bank. This allows exporters to receive upfront cash payment while offering credit terms to importers.

Uploaded by

manjarimandal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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FORFAITING

WHAT IS FORFAITING ?
Forfaiting is a form of international
supply chain financing. It involves
the discount of future payment
obligations on a without recourse
basis.
Forfaiting is a flexible discounting

technique that can be tailored to the


needs of a wide range of counterparties
and
domestic and international
transactions.
Forfaiting can be applied to a wide range

of trade related and purely financial


receivables. Although discounted
receivables typically have maturities
over medium terms of 3 to 5 years they
CHARACTERISTICS
• 100% financing without recourse to the seller of the
debt
• The payment obligation is often but not always
supported by a bank guarantee
• The debt is usually evidenced a legally enforceable
and transferable payment obligation such as a bill
of exchange, promissory note, letter of credit or
note purchase agreement
• Transaction values can range from US$100,000 to
US$200 million
• Debt instruments are typically denominated in one of
the world’s major currencies, with Euro and US
Dollars being most common
• Finance can be arranged on a fixed or floating interest
rate basis

MECHANISM OF FORFAITING SERVICES
Agreement ( 1 )

Delivery of goods - export ( 2 )


E X PO R T E R IM PO R T E R
Delivery of bills of exchange or promissory note
with guarantee from the importers bank ( 4 )
Sale of export bills with endorsement

availised negotiable instrument ( 3 )


Value of bills less discount amount
of availised negotiable instrument

Agreement with the Bank for


Forfaiter Agreement ( 5 )

( cash payment ) ( 7 )
(6)

Presentation of bills on maturity ( 8 )

FO R FA IT E R IM PO R T E R ’ S B A N K
Payment on Maturity of negotiable instrument
BENEFITS OF FORFAITING
q Eliminates Risk
§ Removes political, transfer and commercial risk
§ Provides financing for 100% of contract value
§ Protects against risks of interest rate increase and
exchange rate fluctuation
q Enhances Competitive Advantage
§ Enables sellers of goods to offer credit to their customers,
making their products more attractive
§ Helps sellers to do business in countries where the risk of
non-payment would otherwise be too high
q Improves Cash Flow
§ Forfaiting enables sellers to receive cash payment while
offering credit terms to their customers
§ Removes accounts receivable, bank loans or contingent
liabilities from the balance sheet.
q Increases Speed and Simplicity of Transactions
§ Fast, tailor-made financing solutions
§ Financing commitments can be issued quickly
DIFFERENCE BETWEEN FACTORING
AND FORFAITING
1.Suitable for ongoing 1.
 Oriented towards
open account sales, single transactions
not backed by LC or backed by LC or bank
accepted bills or guarantee.
exchange. 

2. Usually provides 2.


 Financing is
financing for short- usually for medium to
term credit period of long-term credit
upto 180 days. periods from 180 days
upto 7 years though
shorterm credit of 30–
180 days is also
available for large
transactions.
3.Requires a continuous 3. Seller need not route
arrangements or commit other
between factor and business to the
client, whereby all forfaiter. Deals are
sales are routed concluded transaction-
through the factor. wise.
4. Factor assumes 4. Forfaiter’s
responsibility for responsibility extends
collection, helps client to collection of
to reduce his own forfeited debt only.
overheads. Existing financing
lines remains
unaffected.
5. Separate charges are 5.
 Single discount
applied for charges is applied
 —  financing which depend on
 —  collection  —  guaranteeing
 —  administration bank and country risk,
 —  credit
 —  credit period
protection and involved and
—  provision of
 —  currency of
information. debt.
 Only additional
charges is
commitment fee, if
firm commitment is
required prior to draw
down during delivery
period.
6.
 Service is 6. Usually available
available for for export
domestic and receivables only
export receivables. denominated in

any freely
 convertible
7. Financing
 can currency.
be with or without 7. It is always
recourse; the credit ‘without recourse’
protection and essentially a
collection and financing product.
administration
services may also
be provided
THANK YOU

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