What Is Forfaiting?

What Is Forfaiting?

Let me explain forfaiting to you directly: it's a financing method that lets exporters like you get immediate cash by selling your medium and long-term receivables—the money an importer owes you—at a discount to an intermediary. When you do this, you eliminate your risk because the sale is without recourse, meaning you have no liability if the importer defaults on those receivables.

The forfaiter is the person or entity buying those receivables, and then the importer pays them instead. Usually, this forfaiter is a bank or a financial firm focused on export financing.

Key Takeaways

Here's what you need to know: forfaiting is financing that gets exporters immediate cash by selling receivables at a discount via a third party. The payment is often guaranteed by a bank acting as the forfaiter. It shields you from credit risk, transfer risk, and fluctuations in foreign exchange or interest rates. Those receivables turn into debt instruments like unconditional bills of exchange or promissory notes, which can be traded on secondary markets. Maturities vary, but most are between one and three years from the sale date.

How Forfaiting Works

When a forfaiter buys your receivables, it speeds up your payment and cash flow as an exporter. Typically, the importer's bank guarantees the amount. This purchase removes the credit risk from selling on credit to an importer. It also helps importers who can't pay fully upon delivery by facilitating the deal.

Your receivables become a debt instrument that can be traded freely on a secondary market. These are usually unconditional bills of exchange or promissory notes, legally enforceable for security to the forfaiter or any later buyer. Maturities range from one month to 10 years, but most fall between one and three years from sale.

Fast Fact

You should note that forfaiting is most common in large international sales of commodities or capital goods where the price tops $100,000.

Advantages and Disadvantages of Forfaiting

On the advantages side, forfaiting eliminates the risk of not getting paid as an exporter. It protects you from credit risk, transfer risk, and issues with foreign exchange or interest rate changes. It turns a credit sale into a cash transaction, giving you immediate cash flow and cutting collection costs. You can also remove those receivables as a liability from your balance sheet.

It's flexible too—a forfaiter can customize it to your needs for various international deals. You can use it instead of credit or insurance for sales, especially where there's no export credit agency available. It lets you do business with buyers in high political risk countries.

For disadvantages, while it reduces risks, forfaiting is usually more expensive than commercial loans, raising your export costs—which often get passed to the importer in pricing. It's only for transactions over $100,000 with longer terms, and not for deferred payments. There's some bias against developing countries; only certain currencies with international liquidity are accepted. Plus, no international credit agency guarantees forfaiting firms, impacting long-term deals.

Real World Example

Take the Black Sea Trade & Development Bank (BSTDB) as an example—they include forfaiting in their special products alongside underwriting, hedging, leasing, and discounting. BSTDB was set up by 11 countries—Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey, and Ukraine—to finance development projects.

They describe how the importer's obligations are backed by accepted bills of exchange or promissory notes guaranteed by a bank. Their minimum forfaiting deal is 5 million euros, with repayment over one to five years. They might add fees for options, commitments, terminations, or discount rates.