ForfaitingShort to Intermediate Term Financing

Chapter 18

International Finance

Supplementary Material

FORFAITING (Medium-Term Capital Goods Financing)

• Forfaiting means selling a bill of exchange, at a discount, to a third party, the forfaiter.

• The forfaiter collects the payment from an overseas customer, through a collateral bank(s)

• The forfaiter assumes the underlying responsibility of exporters and simultaneously providing trade finance for importers by converting a short-term loan to a medium term one.

• Forfaiting is the discounting of international trade receivables on a without recourse basis.

FORFAITING (Medium-Term Capital Goods Financing)

• Characteristics:– The exporter extends credit for period ranging

between 180 days to 7 years.– Minimum bill size should be US$ 250,000 (US$

500,000/- is preferred)– The payment should be receivable in any major

convertible currency.– A Letter of Credit, or a guarantee by a bank,

usually in importer's country.– The contract can be for either goods or services.

FORFAITING (Medium-Term Capital Goods Financing)

• Documentation:

At its simplest, the receivables must be backed by any of the following debt instruments:– Promissory Note (~ a note payable)– Bill(s) of Exchange– Deferred payment letter of credit– A [bank] letter of guarantee

FORFAITING (Medium-Term Capital Goods Financing)

• Pricing– Discount Rate: LIBOR plus margin– Days of Grace: cover b-days until settlement– Commitment Fee: ~ to cover exposure days

• Benefits:– Eliminates risks like political, transfer and commercial

risks– Enhances competitive advantage.

• Ability to provide vendor financing making products more attractive

• Enables the exporter to do business in risky countries.– Increases cash flow. Forfaiting converts a credit-based

transaction in to a cash transaction.