Forfaiting
 

Forfaiting is a method of trade finance that allows the purchase of trade receivables such bills of exchange, promissory notes, or other freely negotiable instruments at a discount to face value on a without recourse basis debt obligations arising from the supply of goods and/or services.

In a forfaiting transaction, the exporter agrees to sell its rights to claim for payment of goods or services delivered to an importer under a contract of sale, in return for a cash payment from a forfaiter.  In this case, the forfeiter will deduct an interest in the form of a discount, at an agreed rate for the full credit period covered by the notes.  In exchange for the payment, the forfaiter takes over the exporter’s debt instruments and assumes the full risk of payment by the importer. The exporter is thereby freed from any financial risk in the transaction and is liable only for the quality and reliability of the goods or services provided.

However, forfaiters works with the exporter who sells capital goods, commodities, services or large projects and needs to offer periods of credit from 180 days to up 7 years based on the importer strengthen and his country risk level.  In forfaiting, receivables are normally guaranteed by the importer’s bank allowing the exporter to take the transaction off the balance sheet to enhance its key financial ratios.

The risks which now no longer concern the exporter are borne by the forfeiter who arranges to receive repayment from the overseas buyer and / or the buyer's bank (the guarantor). The buyer will benefit from the agreed period of credit together with the pre-agreed repayment dates and fixed interest rate on the outstanding amount of the debt.

Forfaiting offers the exporter a range of advantages that are set out below. The main advantage is that cash is received shortly after delivery of the goods and the lengthy, intricate procedures and paperwork associated with state-insured buyer- and supplier-credits may be avoided.

In forfaiting financing, the forfeiter will bear all risks associated with the payment such as:

• Political Risk

• Commercial Risk

• Currency Risk

• Interest rate Risk

• Collection Responsibility at Maturity

• Transfer Risk

Forfaiting Key Points:

• Up to 100% financing of goods and/or services face value eliminating the exporter’s risk

• The financing is usually guaranteed by a local bank in the form of a bank guarantee, letter of credit confirmation, promissory note etc.

• Financing amounts can reach to millions

• Turns a credit sale into a cash deal

• Variable rates based on LIBOR and can be agreed on a fixed rate, although it can also be arranged on a floating interest-rate bearing basis

• Capital goods of all types are eligible including machinery, software and any long-term capital purchased and related goods and services

• Fast conclusion and closing of transactions in any major currency

• Simple documentation requirement

Forfaiting Advantages:

• Forfaiting offers several advantages to both the exporter and importer allowing them to conclude deals which they never believed they can achieve due to financial restrictions. Some of the advantages include:

• Exporter is paid cash whenever all necessary documentation is submitted and the discount effected, allowing the export to improve his own cash flow

• Enables the exporter to do business in countries where the country risk is too high

• No accounts receivables in the exporter’s balance sheet

• Allow the exporter  to grant longer payment terms and yet receive the proceeds immediately

• Forfaiting is possible to countries where there is no official export credit scheme

• Eliminates all credit and cross border transfer risks

• Importers can offer their suppliers 100% of goods and/or services face value while the repayment plan can be tailored to the buyer’s specific needs and capabilities

• Financing available at competitive rates when compared to other types of financing

• All financing costs are known in advance

• Financing is available in all major currencies

• Flexible financing terms that can reach up to 7 years

Instruments used in Forfaiting:

Financing can be granted upon when the buyer provides evidence of debt owed to the export. These instruments usually carries unconditional, irrevocable and freely transferable guarantee or aval of a bank or sovereign authority in the buyer’s country. Several transferable instruments can be used such as:

• Letter of Credit

• Bill of Exchange

• Bank Guarantee

• Promissory Note

How Forfaiting Works:

• Exporter approach a forfaiter and ask for a quote

• Forfaiter  will upon review and approval of submitted information and documents submit to the exporter an offer

• Upon accepting the offer, the forfaiter will issue a commitment

• Exporter ships the goods

• Exporter will send the documents to forfaiter for their review and payment

Factoring

Factoring is the purchase of a company’s accounts receivable at a discount converting these receivable from credit into cash instead of waiting for weeks or months until been paid. The major benefit to a company who has a need for cash flow assistance is the resulting increase of profits and better operating efficiency due to the economizing of cost. Factoring is considered one of the quickest, most flexible and fast, methods of financing for companies seeking to raise working capital and it is used by most types of industry so that they can achieve the success they are striving for. Factoring is suitable for companies seeking to raise capital for expansion, growth, survival or restructuring.

Factoring is not bailing out a company in trouble. A factor is not to be confused with a collection agency. A factor does not advance funds or purchase commercial paper unless it makes good business sense to do so.

Factoring is not a LOAN; it is the purchase of the seller’s accounts receivables at a discount by the factor. A traditional bank loan will use all company’s assets and as collateral and may require personal guarantees. In factoring, the credit worthiness of the buyer are considered and not the seller balance sheet, credit worthiness or history. In factoring, unlike a traditional loan, it would not be added to the balance sheet of the seller, and there are no loans to repay. In other words, factoring will convert accounts receivables or invoices into CASH.

Factoring can be suitable to new companies as there are no requirements for a long-term credit history.

Factoring Key Points:

• Provides capital for growth

• Offers flexible terms not available from other financial sources

• Suitable to new, small and medium size companies

• Suitable when dealing with emerging markets

• Capital goods of all types are eligible including machinery, software and any long-term capital purchased and related goods and services

• Fast conclusion and closing of transactions in any major currency

• Simple documentation requirement

• Access cash to pay your obligations

• Increased sales in foreign markets by offering competitive terms of sale

• Protection against credit losses on foreign customers

• Lower costs than the aggregate charges for Letters of Credit transactions

• No need to open Letters of Credits

Factoring Advantages:

• Factoring does not create debt on your balance sheet

• Allow you to get cash without the need to use inventory, equipment or real estate as collateral

• Easy process to flow and comply with

• Quick closing and disbursement of money

• Get paid within 24hours instead of waiting for a long time

• Offer competitive payment terms to your clients

How Factoring Works:

• After you issue an invoice to your customer and deliver the goods or services, a copy of the invoice is sent to the factoring house

• The factoring house will process the invoice and give you a percentage of the invoice value

• When the buyer pays the money to the factoring house, the factoring house will then pay the remaining balance less the factoring fee