Forfaiting

Forfaiting

Forfaiting is a form of trade finance that lets exporters convert medium- and long-term receivables into immediate cash. The exporter sells receivables—typically evidenced by legally enforceable instruments such as bills of exchange or promissory notes—to a third party (the forfaiter) at a discount and without recourse. The forfaiter (often a bank or specialized finance firm) assumes the credit and political risk; the importer or its bank repays the forfaiter at maturity.

Key points

• Converts credit sales into cash sales by selling receivables at a discount.
• Sale is usually without recourse, shifting default risk from exporter to forfaiter.
• Receivables are documented as tradeable debt instruments (bills of exchange, promissory notes).
• Typical maturities most commonly fall between one and three years, though they can range from about one month up to ten years.
• Commonly used for large international transactions (often > $100,000), such as capital goods and commodities.

How forfaiting works

1. The exporter ships goods and grants credit to the importer.
2. The importer’s obligation is documented by an unconditional, enforceable instrument (accepted bill of exchange or promissory note), often guaranteed or avalled by the importer’s bank.
3. The exporter sells these instruments to a forfaiter at a discount and without recourse.
4. The forfaiter pays the exporter immediately, improving the exporter’s cash flow and removing collection responsibilities.
5. At maturity, the importer (or its bank) pays the forfaiter.

Advantages

• Immediate cash flow and elimination of collection and credit risk for the exporter.
• Removes accounts receivable from the exporter’s balance sheet.
• Protection against credit risk, transfer risk, and certain currency or interest-rate risks.
• Flexible and can be tailored to different transactions and country-risk profiles.
• Useful where export credit agencies or traditional guarantees are unavailable.

Disadvantages

• Generally more costly than conventional commercial lending; higher financing costs may be passed to the importer.
• Typically suited to larger transactions and longer terms; not practical for small, short-term receivables.
• Limited to currencies with international liquidity; some developing-country transactions may face discrimination.
• No global, centralized guarantee agency for forfaiting, which can constrain very long-term arrangements.
• Fees and pricing (discounts, commitment or termination fees) can add complexity.

Example application

Multilateral and regional development banks and specialized export financiers often offer forfaiting as a product for financing sizable projects and cross-border trade. Such providers may set minimum operation sizes (for example, several million euros) and repayment windows of one to five years, and may charge option, commitment, termination, or discount-rate fees.

When to consider forfaiting

• Exporter needs immediate liquidity and risk transfer for medium- to long-term receivables.
• Transactions are substantial in size and documented by enforceable instruments or bank guarantees.
• Exporter wishes to avoid collection costs and balance-sheet receivables.
• Exporting to a country with elevated political or transfer risk where other guarantees are unavailable.

Forfaiting is a specialized tool that can simplify cross-border trade financing and transfer significant risk away from exporters, but it comes at a price and is most effective for large, documented, medium- to long-term transactions.