What is forfaiting?
Forfaiting is a form of long-term financing in international trade in which an exporter sells its receivables to a financial institution, called a forfaiter, in exchange for immediate cash. The key feature of this solution is the lack of recourse, which means that the exporter does not bear the risk of buyer insolvency – full responsibility for repayment passes to the forfaiter.
Forfaiting is particularly useful in high-value export transactions where payment terms range from several months to several years. Transactions are often secured by bills of exchange, documentary letters of credit or other debt instruments, which increases the security of the financing.
Frequently asked questions (FAQ)
1. How does forfaiting work?
Forfaiting starts with an exporter who sells goods or services to a foreign buyer on credit terms, e.g. with payment deferred for 180 days. The exporter then transfers his receivables to a forfaiter, which can be a bank or another financial institution. In return, the forfaiter immediately pays the exporter the funds, deducting a fee for assuming the risk. Ultimately, the buyer repays its liability to the forfaiter according to the agreed schedule. This allows the exporter to eliminate credit risk and gain quick access to funds that can be used for further business.
2. What are the main benefits of forfeiting?
An exporter using forfeiting receives immediate payment for the transaction, which eliminates the need to wait for payment from the counterparty. Another significant advantage is the complete elimination of the risk of buyer insolvency, as the forfeiter assumes full responsibility for payment. In addition, forfeiting improves financial liquidity and allows for investing in new contracts without the need to use one’s own collateral, as the claim itself acts as the main collateral for the transaction. The buyer, on the other hand, gains the possibility of obtaining a longer payment period and avoids the need to use their own bank loan.
3. How does forfeiting differ from factoring?
The main difference between forfeiting and factoring is the scope and nature of the transactions. Forfeiting usually involves large, single export transactions with long payment terms, while factoring is mainly used in domestic trade and involves many smaller claims with shorter payment terms. Furthermore, forfeiting always takes place without recourse, meaning that the exporter is not liable for the buyer’s insolvency – unlike some forms of factoring, which may include recourse.
4. What financial instruments are used in forfeiting?
In forfeiting transactions, various payment security instruments are commonly used. These include commercial bills of exchange, which oblige the buyer to pay within a specified period, documentary letters of credit issued by the buyer’s bank as a guarantee of payment, and bank guarantees, which provide additional security in the event of the buyer’s insolvency.
5. In which industries is forfaiting used?
Forfaiting is particularly popular in sectors that require large financial outlays and long-term payments. In industrial production, it is often used for the sale of machinery, equipment and production lines. In commodity trading, this type of financing is used for transactions involving large quantities of goods such as oil, steel or timber. Forfaiting is also used in infrastructure projects such as the construction of roads, power plants or industrial plants.
Forfaiting is an effective export financing method that eliminates the risk of counterparty insolvency, provides immediate financial liquidity, and facilitates international trade, especially for large transactions with deferred payment terms.
