Forfaiting

Forfaiting

Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their medium and long-term foreign accounts receivable at a discount to a forfaiter, a spe­cialized finance firm or a department in a bank. Forfaiting can help exporters improve cash flow, particularly when pursuing sales to foreign buyers who depend on longer financing terms which can stretch for months or years.

Because forfaiting eliminates virtually all risk of non-payment for the exporter, the fees associated with forfaiting are often higher than other types of commercial lender financing. In the U.S., forfaiting is mainly used by established large and medium-sized corporations that export capital goods and commodities on transactions exceeding $100,000. Forfaiting can also offer opportunities in markets considered high-risk.

Most forfaiting transactions will have a maturity ranging between 180 days and seven years, the payment period for foreign buyers of U.S. exports. Forfaiters, not U.S. exporters, are responsible for collecting payments from foreign buyers.

This is how forfaiting works:

1. Communicate with prospective importer - An exporter discusses a potential sale with an importer in need of extended credit terms.
2.  Contact a forfaiter - An exporter should then approach a forfaiter early in the process before pricing negotiations with the importer. That way, the exporter can build the forfaiting cost into the  sale price.
3. Present transaction details to forfaiter - The exporter presents details of the proposed sale and financing to the forfaiter. Typical details include name of buyer, type of goods being sold, date, duration, and currency of the contract, credit period, payment schedule, and evidence of debt.
4. Sign commitment letter with forfaiter - Within days, the forfaiter evaluates the transaction and feasibility of the deal and determines a discounted price at which to purchase the accounts receivable. If the discounted price is accepted, the exporter signs a commitment letter issued by the forfaiter.

Since this payment is without recourse, the exporter has no further interest in the financial aspects of the transaction, and it is the forfaiter who must collect the future payments due from the importer.