Forfaiting is a form of Receivables Purchase, consisting of the without recourse purchase of future payment obligations represented by financial instruments or payment obligations normally in negotiable or transferable form , at a discount or at face value in return for a financing charge. Forfaiting requires the existence of an underlying payment obligation usually embodied in some form of legal instrument distinct from the commercial transaction that gave rise to it. Such commercial transactions could be exports, imports or domestic trade. Typical payment instruments include negotiable instruments such as bills of exchange and promissory notes but obligations arising from letters of credit are also widely forfaited. All of these are ideal for forfaiting because they are, by law or agreement, independent from the underlying trade, benefit from a robust legal regime, and are easily transmissible to third parties through endorsement or assignment. This legal autonomy, founded on well-established law and precedent, giving rise to receivables which may be easily sold is a hallmark of forfaiting.
|Published (Last):||1 September 2019|
|PDF File Size:||9.94 Mb|
|ePub File Size:||6.80 Mb|
|Price:||Free* [*Free Regsitration Required]|
The exporter eliminates risk by making the sale without recourse. A forfaiter is typically a bank or a financial firm that specializes in export financing. A forfaiter's purchase of the receivables expedites payment and cash flow for the exporter. The importer's bank typically guarantees the amount. Forfaiting facilitates the transaction for an importer that cannot afford to pay in full for goods upon delivery.
The receivables are typically in the form of unconditional bills of exchange or promissory notes that are legally enforceable providing security for the forfaiter or a subsequent purchaser of the debt. Most maturities fall between one and three years from the time of sale.
Forfaiting eliminates the risk that the exporter will receive payment. The practice also protects against credit risk, transfer risk, and the risks posed by foreign exchange rate or interest rate changes.
Forfaiting simplifies the transaction by transforming a credit-based sale into a cash transaction. This credit-to-cash process gives immediate cash flow for the seller and eliminates collection costs. Additionally, the exporter can remove the accounts receivable, a liability, from its balance sheet. Forfaiting is flexible. Exporters can use forfaiting in place of credit or insurance coverage for a sale. Forfaiting is helpful in situations where a country or a specific bank within the country does not have access to an export credit agency ECA.
Forfaiting mitigates risks for exporters, but it is generally more expensive than commercial lender financing leading to higher export costs. These higher costs are generally pushed onto the importer as part of the standard pricing. Some discrimination exists where underdeveloped countries are concerned compared to Western countries. For example, only selected currencies are taken for forfaiting because they have international liquidity. Lastly, there is no International Credit Agency that can provide guarantees for forfaiting companies.
By using Investopedia, you accept our. Your Money. Personal Finance. Your Practice. Popular Courses. Markets International Markets. What Is Forfaiting? Key Takeaways Forfaiting helps exporters to receive payment for a shipment without any risk. The payment amount is typically guaranteed by an intermediary such as a bank, which is the forfaiter.
Forfaiting also protects against credit risk, transfer risk, and the risks posed by foreign exchange rate or interest rate changes. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
Related Terms The Benefits and Disadvantages of Investing in Fixed-Income Securities A fixed-income security is an investment providing a level stream of interest income over a period of time. Understanding Trust Receipts A trust receipt is a notice of the release of merchandise to a buyer from a bank, with the bank retaining the ownership title of the released assets. How Trade Finance Eases Transactions for Importers and Exporters Trade finance represents the financial instruments and products that are used by companies to facilitate international trade and commerce.
Sight Draft A sight draft is a type of bill of exchange, in which the exporter holds the title to the transported goods until the importer receives and pays for them.
Bank Endorsement A bank endorsement is an endorsement by a bank for a negotiable instrument, such as a banker's acceptance or a letter of credit. Without Recourse Without recourse pertains to when the buyer of a promissory note or other negotiable instrument assumes the risk of default. Partner Links. Related Articles. International Markets Who uses bills of exchange? Loan Basics Bank Guarantee vs. Letter of Credit: What's the Difference?
In the U. Exporters sell their debts under a forfating agreement without recourse basis , which means that once the debt is sold the non-payment risk passes to the forfaiter. What would be happening to the original payment obligation will not be concerning the sellers after that point. Friday, June 5, Homepage Letter of Credit Consultancy Contact.
The third party providing the support is termed the forfaiter. The forfaiter provides medium-term finance to, and will commonly also take on certain risks from, the importer; and takes on all risk from the exporter, in return for a margin. At its simplest, the receivables should be evidenced by a promissory note, a bill of exchange, a deferred-payment letter of credit, or a letter of forfaiting. The benefits to the exporter from forfaiting include eliminating political, transfer, and commercial risks and improving cash flows. The benefit to the forfaiter is the extra margin on the loan to the exporter. Its purpose is to develop business relationships and assist other forfaiting-related organizations. From Wikipedia, the free encyclopedia.