Forfaiting
An export financing technique where a bank purchases, without recourse, medium-term receivables materialised by avalised bills of exchange.
Forfaiting is an international trade financing technique where a forfaiter (bank or financial institution) purchases without recourse medium-term receivables (6 months to 7 years) held by the exporter against the foreign buyer.
The receivables are typically materialised by avalised bills of exchange from the buyer's bank or guaranteed promissory notes. The 'without recourse' nature is fundamental: if the buyer defaults, the forfaiter bears the loss, not the exporter.
Advantages for the exporter:
- Immediate cash for the full sale price
- Risk elimination: commercial, political, currency and interest rate risks
- Balance sheet relief: the assigned receivable is removed from the balance sheet
- Administrative simplicity: no collection management required
The cost of forfaiting includes a discount rate comprising the reference rate, country and bank risk margin, and days of grace. It is particularly suited to exports of capital goods to emerging markets.