FORFAITING

Forfaiting Overview

With the exception of it being a funny word that everyone thinks is another word you are mispronouncing, forfaiting is an excellent tool for raising trade financing very quickly and with little fuss. a common method of financing international trade that provides cash to exporters in return for selling their medium and long-term foreign accounts receivable. The accounts are sold to a forfaiter, a specialized financier or bank that performs non-recourse export financing through the purchase of medium and long-term trade receivables, at a discount without recourse.

Forfaiting Key Points

Forfaiting eliminates virtually all risk to the exporter, with 100 percent financing of contract value
Exporters can offer medium and long-term financing in markets where the credit risk would otherwise be too high
Suitable for exports of capital goods, commodities and large projects on medium and long-term credit
Forfaiting generally works with bills of exchange, promissory notes, or a letter of credit
Financing can be arranged on a one-shot basis in any of the major currencies, usually at a fixed interest rate
Forfaiting can be used in conjunction with officially supported credits backed by export credit agencies
In most cases, foreign buyers must provide a bank guarantee in the form of a letter of guarantee or letter of credit

Description of Forfaiting

Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their medium and long-term foreign accounts receivable at a discount on a “without recourse” basis. A forfaiter is a specialized finance firm or a department in a bank that performs non-recourse export financing through the purchase of medium and long-term trade receivables. “Without recourse” or “non-recourse” means that the forfaiter assumes and accepts the risk of non-payment. Similar to factoring, forfaiting virtually eliminates the risk of non-payment, once the goods have been delivered to the foreign buyer in accordance with the terms of sale. However, unlike factors, forfaiters typically work with exporters who sell capital goods and commodities, or engage in large projects and therefore need to offer extended credit periods from 180 days to seven years or more. In forfaiting, receivables are normally guaranteed by the importer’s bank, which allows the exporter to take the transaction off the balance sheet to enhance key financial ratios. Most users of forfaiting are large established corporations, but small and medium-size companies are slowly embracing forfaiting as they become more aggressive in seeking financing solutions for exports to countries considered high risk.

Cost of Forfaiting

The cost of forfaiting to the exporter is determined by the rate of discount based on the aggregate of the LIBOR (London inter bank offered rate) rates for the tenor of the receivables and a margin reflecting the risk being sold. In addition, there are certain costs that are borne by the importer that the exporter should also take into consideration. The degree of risk varies based on the importing country, the length of the loan, the currency of the transaction, and the repayment structure–the higher the risk, the higher the margin and therefore the discount rate. However, forfaiting can be more cost-effective than traditional trade finance tools because of the many attractive benefits it offers to the exporter.

How Forfaiting Works

The exporter approaches a forfaiter before finalizing the transaction’s structure. Once the forfaiter commits to the deal and sets the discount rate, the exporter can incorporate the discount into the selling price. The exporter then accepts a commitment issued by the forfaiter, signs the contract with the importer, and obtains, if required, a guarantee from the importer’s bank that provides the documents required to complete the forfaiting. The exporter delivers the goods to the importer and delivers the documents to the forfaiter who verifies them and pays for them as agreed in the commitment. Since this payment is without recourse, the exporter has no further interest in the financial aspects of the transaction and it is the forfaiter who must collect the future payments due from the importer.

History of Forfaiting

Forfaiting was developed in Switzerland in the 1950s to fill the gap between the exporter of capital goods, who would not or could not deal on open account, and the importer, who desired to defer payment until the capital equipment could begin to pay for itself. Although the number of forfaiting transactions is growing worldwide, there are currently no official statistics available on the size of the global forfaiting market. However, industry sources estimate that the total annual volume of new forfaiting transactions is around $30 billion and that forfaiting transactions worth $60 to $75 billion are outstanding at any given time. Industry sources also estimate that only 2 percent of world trade is financed through forfaiting. U.S. forfaiting transactions account for only 3 percent of that volume. Forfaiting firms have opened around the world, but the Europeans maintain a hold on the market, including in North America. Although these firms remain few in number in the United States, the innovative financing they provide should not be overlooked as a viable means of export finance for U.S. exporters.

Advisory Support

Shanghai Capital Group offers financial instrument monetization services for individuals, companies, governments and other organizations for transactions over $100k with no upper limit. Project funding is arranged through our network of individual, corporate, private and institutional lenders which include investment banks, merchant banks, private international banks, and trusts. Our Project Funding services are backed by a wealth of experience and unsurpassed expertise, in addition to the most advanced financing solutions available anywhere in the world. We source unique funding alternatives through capital markets and lenders worldwide for a wide variety of situations. Our team routinely provides project funding services for some of the most challenging and complex projects in the world, each of which expands our experience and capabilities. With access to investment grade and non-investment grade markets, we have developed increasingly innovative project funding solutions in addition to traditional project financing structures. We are also pleased to offer our clients all forms of bank and capital market financing and can combine different project funding methods for particularly complex transaction. Our experience providing financing that involves multiple project funding sources – including multilateral, developmental and export credit institutions – is extensive. When specialized expertise is necessary, we draw on relationships with a team of highly experienced advisers. When coupled with our international capital market relationships, we are perfectly positioned to advise clients on every aspect of the transaction and financing. Our worldwide network of lenders positions us to execute funding on advantageous terms, and to provide funding solutions for funding requirements outside the conventional market.