How Forfaiting Works; understanding what forfaiting is and how it works

Forfaiting is one of the international supply chain financing methods. Forfaiting means the discount of future payment obligations on a without recourse basis, in other words, forfaiting is discounting of trade‐related receivables secured with trade finance instruments such as bills of exchange, promissionary notes or deferred payment letter of credit.  In the U.S., forfaiting is known as "structured trade finance", and every year more than $300 billion of world trade takes place using forfaiting.     

What are the main characteristics of forfaiting ?

Forfaiting is an international trade finance tool. It helps exporters or international manufacturing companies to reach cash flow by selling their debts which are mostly supported by a bank guarantee with a discounted price to forfaiting companies. Good thing is that selling debts under a forfating agreement is made without recourse basis, which means that once you sell your debt you will be passing the non-payment risk to the forfaiter. What would be happening to original payment obligation will not be your concern any more. 
  • Forfaiting can be applied to a wide range of trade related and purely financial receivables typically have maturities from 3 months to 10 years.
  • Forfaiting can be applied to both international and domestic transactions.
  • 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 or letter of credit.
  • 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.  (source: IFA Website :  http://www.forfaiters.org/forfaiting/what-is-forfaiting)

Basic forfaiting transactions explained with the help of graphic illustration
Below you can find basic forfating transaction which is explained with help of a graphic illustration. 
Figure 1 : Basic Forfaiting Transaction

  • Step 1 : Forfaiter and Exporter agreed upon a Forfaiting Agreement. 
  • Step 2 : Sales Contract has been signed between Exporter and Importer.
  • Step 3 : Shipment is initiated by the exporter.
  • Step 4 : The importer obtains a guarantee from his bank.
  • Step 5 : The importer obtains a guarantee from his bank.
  • Step 6 : Exporter gives documents to forfaiter.
  • Step 7 : Forfeiter controls the documents pays for them as indicated on the Forfaiting Agreement.
  • Step 8 : Forfeiter presents documents to bank at maturity date.
  • Step 9 : Importer pays to bank at maturity date.
  • Step 10 : Bank pays to forfeiter at maturity date. 
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How Forfaiting Works; understanding what forfaiting is and how it works.
We discuss how forfaiting works as a trade finance tool on this page with the help of a graphic illustration.

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