Forfaiting

Forfaiting

In trade finance, forfaiting involves the purchasing of receivables from exporters. The forfaiter will take on all the risks involved with the receivables. It is different from the factoring operation in the sense that forfaiting is a transaction based operation while factoring is a firm based operation - meaning, in factoring, a firm sells all its receivables while in forfaiting, the firm sells one of its transactions.

Benefits for using forfaiting include eliminating risks (political, transfer and commercial risks) and improving cashflows.Increases cash flow. Forfaiting converts a credit-based transaction in to a cash transaction.

The characteristics of a forfaiting transaction are:

# Credit is extended by the exporter for period ranging between 180 days to 7 years.
# Minimum bill size should be US$ 250,000/- (US$ 500,000/- is preferred)
# The payment should be receivable in any major convertible currency.
# An L/C or a guarantee by a bank, usually in importer's country.
# The contract can be for either goods or services.

Documentation

At its simplest the receivables should be evidenced by any of the following debt instruments:

# Promissory note.
# Bill of exchange.
# Deferred payment letter of credit.
# A letter of guarantee.

Pricing

There are three elements to the pricing of a forfaiting transaction:

# Discount rate: This is the interest element, usually quoted as a margin over LIBOR.
# Days of grace: These are added on to the actual number of days until maturity for the purpose of covering the number of days normally experienced in the transfer of payment, applicable to the country of risk.
# Commitment fee: This is applied from the date the forfaiter is committed to undertake the financing, until the date of discounting.

External links

* [http://www.forfaiters.org International Forfaiting Association (IFA) Homepage]


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Look at other dictionaries:

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  • forfaiting — /ˈfɔfeɪtɪŋ/ (say fawfayting) noun the purchase of receivables such as promissory notes, bills of exchange, letters of credit, etc., from an exporter, usually at a discount, the advantage to the seller being that it converts credit to cash.… …  

  • forfaiting — / fɔ:fɪtɪŋ/ noun providing finance for exporters, where an agent (the forfaiter) accepts a bill of exchange from an overseas customer; he buys the bill at a discount, and collects the payments from the customer in due course …   Dictionary of banking and finance

  • International Forfaiting Association — The International Forfaiting Association was founded in 1999 as the worldwide trade association for the forfaiting industry. Its purpose is to develop business relationships and assist organisations involved in the forfaiting industry. IFA… …   Wikipedia

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