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What is Forfaiting?

Forfaiting is a form of international supply chain financing. It involves the discount of future payment obligations on
a without recourse basis.
Forfaiting can be applied to a wide range of trade related and purely financial receivables. Although discounted
receivables typically have maturities over medium terms of 3 to 5 years they can be as short as 6 months or as
long as 10 years.
Forfaiting is a flexible discounting technique that can be tailored to the needs of a wide range of counterparties and
domestic and international transactions. Its key characteristics are:

 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, letter of credit or note purchase agreement.
 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.

Benefits of Forfaiting
Eliminates Risk

 Removes political, transfer and commercial risk


 Provides financing for 100% of contract value
 Protects against risks of interest rate increase and exchange rate fluctuation

Enhances Competitive Advantage

 Enables sellers of goods to offer credit to their customers, making their products more attractive
 Helps sellers to do business in countries where the risk of non-payment would otherwise be too high

Improves Cash Flow

 Forfaiting enables sellers to receive cash payment while offering credit terms to their customers
 Removes accounts receivable, bank loans or contingent liabilities from the balance sheet

Increases Speed and Simplicity of Transactions

 Fast, tailor-made financing solutions


 Financing commitments can be issued quickly
 Documentation is typically concise and straightforward
 No restrictions on origin of export
 Relieves seller of administration and collection burden

Forfaiting Example
In order to illustrate how forfaiting takes place in practice, the following is a typical forfaiting transaction where the
buyer and the seller of goods are located in different countries.

1. During the course of negotiations between an exporter and an importer for the supply of goods, the
importer asks for credit terms.
2. The exporter approaches a forfaiter and asks for an indication of whether the forfaiter is willing to provide
this credit and how much it is likely to cost. At this stage the forfaiter will need to know:
o The country of the importer
o The importer's name
o The type of goods
o The value of the goods
o The expected shipment date
o The repayment terms sought by the importer
o Whether the importer's obligations will be guaranteed by a bank, and if so, who?
3. The forfaiter provides the exporter with an indication of the costs involved. At this stage neither party is
committed in any way.
4. When the details of the commercial contract have been agreed, but usually before it has been signed, the
exporter asks the forfaiter for a commitment to purchase the debt obligations (bills of exchange, promissory notes
etc) created under the export transaction.
5. The information required for this is the same as for an indication.
6. The forfaiter issues a commitment which is accepted by the exporter and which is binding on both parties
(1). This commitment will contain the following points:
o The details of the underlying commercial transaction.
o The nature of the debt instruments to be purchased by the forfaiter.
o The discount (interest) rate to be applied, together with any other charges
o The documents that the forfaiter will require in order to be satisfied that the debt being
purchased is valid and enforceable
o The latest date that the exporter can deliver these documents to the forfaiter
7. The exporter signs the commercial contract with the importer and delivers the goods (2+3).
8. In return, if required, the importer obtains a guarantee from his bank (4) provides the documents that the
exporter requires in order to complete the forfaiting (5). This exchange of documents is usually handled by a bank,
often using a Letter of Credit, in order to minimise the risk to the exporter.
9. The exporter delivers the documents to the forfaiter who checks them and pays for them as agreed in the
commitment (6+7).
10. Since this payment is without recourse, the exporter has no further interest in the transaction. It is the
forfaiter who collects the future payments due from the importer (8) and it is the forfaiter who runs all the risks of
non-payment.
Forfaiting Calculations
A discount-to-yield or straight discount calculation takes the following steps:

 Calculate the total number of days between disbursement and maturity; adjust for non-working days and
add the grace days.
 Calculate the number of whole year periods (for annual yield) or 183-/182-day-periods (for semi-annual
yield).
 Calculate a factor as described below (basis 365/360).
 The face value is divided by this factor to give the net value (multiplied in the case of Straight Discount).

A Microsoft Excel spreadsheet with these calculations is available for download below. This resource was
provided by VEFI (The Association of Forfaiters in Switzerland).