Forfaiting

Summary of Forfaiting

A means of financing trade based upon the transfer of debt obligations arising from the sale of goods and services, usually exports. The merchant sells to the forfaiter, without recourse, the debt obligation of the foreign purchaser, usually in the form of a trade bill of exchange or promissory note, bearing an aval, i.e., an unconditional and transferable guarantee of a bank or governmental agency.

(Main Author: William J. Miller)

Forfaiting in International Trade

Meaning of Forfaiting, according to the Dictionary of International Trade (Global Negotiator): The purchase by the forfaiter of an exporter's accounts receivable which are based on negotiable instruments such as bills of exchange and promisory notes. In contrast to factoring, forfaiting involves a series of independent, medium-to-longer-term obligations of higher value. Since the forfaiter purchases the bills o a non-recourse basis, he assumes both commercial and political risk. Forfaiting differs from export factoring in the following three ways:

Factors usually want access to all or a large percentage of an exporter's business, while forfaiters will work on a transaction-by-transaction basis.

Forfaiters usually work with medium and long term receivables, while factors work with short term receivables. Since payment terms usually reflect the types of products involved , forfaiters usually work with sales of capital goods (machinery), commodities and large projects, while factors work mostly with sales of consumer goods.

Most factors do not have strong capabilities with developing countries where legal and financial frameworks are inadequate and credit information is rarely available through affiliate factor. However, most forfaiters are willing to work with sales to such countries because they usually required bank or sovereign guarantees.