In trade finance, forfaiting involves the purchasing of receivables from exporters. The forfaiter takes on all risks involved with the receivables. It is different from the factoring operation in the sense that forfaiting is a transaction-based operation while factoring is a firm-based operation: In factoring, a firm sells all its receivables while in forfaiting, the firm sells one of its transactions.
The characteristics of a forfaiting transaction are:
- Credit is extended by the exporter for a period ranging between 180 days to seven years.
- Minimum bill size is normally US$ 250,000, although $500,000 is preferred.
- The payment is normally receivable in any major convertible currency.
- A letter of credit or a guarantee is made by a bank, usually in the importer's country.
- The contract can be for either goods or for services.
At its simplest the receivables should be evidenced by a promissory note, a bill of exchange, a deferred-payment letter of credit, or a letter of guarantee.
Three elements relate to the pricing of a forfaiting transaction:
- Discount rate, the interest element, usually quoted as a margin over LIBOR.
- Days of grace, added to the actual number of days until maturity for the purpose of covering the number of days normally experienced in the transfer of payment, applicable to the country of risk.
- Commitment fee, applied from the date the forfaiter is committed to undertake the financing, until the date of discounting.
The benefits from forfaiting include eliminating political, transfer, and commercial risks and improving cash flows.
Professional association
The International Forfaiting Association was founded in 1999 as the worldwide trade association for the forfaiting industry. Its purpose is to develop business relationships and assist other forfaiting-related organizations
As of November 2009, its executive committee members were Lucio Matassoni, chairman; Steve Coleman, deputy chairman; Norbert Fritsch, treasurer; and Paolo Provera, Sema Zeyneloglu, Walthraud Raderschall, Salvatore Chiappinelli, and Quian Xiao, board members.
External links
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