What is Forfaiting? What Forfaiting Does? – Here is the answer for it.

Financing of international trade is a complex and sophisticated affair. It requires a mechanism that addresses the concerns of both the exporter (seller) and importer (buyer). Obviously, there are several issues, some of them tricky, in any cross border trade transaction. Some of the major issues involved in international trade are, the solvency and standing of the buyer and seller, the local laws, the different currencies and their values, the local customs and practices, and last but not the least, different languages. All of these factors impact cross-border trade in different ways.

What is the use of Forfaiting?

Forfaiting is a mechanism to finance international trade under which the exporter (seller) gets his Drafts or Bills of Exchange pre-accepted by the importer (buyer)’ and further availed by the importer’s Bank, and gets the same purchased by the Forfaiter. The forfaiter, the purchaser of the receivables, becomes the entity to whom the importer is obliged to pay its debt.

In, trade finance forfaiting is the financial transaction involving the purchase of receivables from exporters by a forfaiter. The forfaiter takes on all the risks associated with the receivables but earns a margin. The forfaiting is a transaction involving the sale of one of the firm’s transactions.

There are three major features of a forfaiting transaction:

• Firstly, the forfaiter purchases the exporter’s Draft for the full value of it (100%). Unlike in a factoring transaction, where a part of the bill amount is retained by the factor as a reserve.
• The second major feature is that the forfaiter undertakes this transaction without recourse to the seller. The forfaiter cannot revert to the seller to recover the money he had advanced to the seller, in the event of default in payment by the buyer.
• The third major feature of the forfaiting transaction is that the forfaiter is practically assured of payment, because the Draft is pre-accepted by the buyer, and also availed by the buyer’s Banker.

One of the principal forfait options offered is up to one hundred per cent funding, while not recourse to the vendor of the due . The Forfaiting offers exporters flexibility inside a straightforward structure whereas increasing their ability to win business in competitive international markets. The due is sometimes proved by lawfully enforceable and freely transferable payment obligations e.g. a bill of exchange, note or letter of credit.