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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