Forfaiting is a financing technique that involves the sale of medium to long-term trade receivables to a forfaiter at a discount. In other words, it is a method of financing where the exporter sells their receivables from a foreign buyer to a third party at a discount in exchange for cash payment. This transaction is usually done without recourse, meaning that the exporter is no longer responsible for any non-payment by the foreign buyer.
Forfaiting is commonly used in international trade, especially when dealing with countries that have unstable political or economic conditions. The financing technique helps the exporter to obtain immediate cash for their receivables and transfers the risk of non-payment to the forfaiter.
Forfaiting transactions are typically structured as follows: the exporter sells the goods to the foreign buyer on credit and issues a promissory note. The exporter then approaches a forfaiter, who purchases the promissory note at a discount. The forfaiter receives the right to receive payment from the foreign buyer when the promissory note matures, while the exporter receives immediate cash from the forfaiter.
Forfaiting is often used in transactions involving large amounts of money, such as capital goods, infrastructure projects, and natural resource projects. It is also used in transactions where the importer is a government or a government-owned entity.
Forfaiting has become a popular financing option for exporters because it provides them with a way to reduce risk and obtain immediate cash flow. It also allows them to offer more competitive credit terms to their foreign buyers, which can help them win more business. Forfaiting is also beneficial for forfaiters, who can earn a profit by purchasing receivables at a discount and holding them until maturity.