Forfaiting – Export Finance & Guarantees
Introduction
Forfaiting is similar to factoring but used primarily in International Trade (Exports).
"Forfaiting is the non-recourse discounting of export receivables."
1. Mechanism
- Exporter sells goods to Importer.
- Importer gives a Bill of Exchange guaranteed by his bank (Avalised Bill).
- Exporter sells this bill to a Forfaiter (Specialized Bank).
- Forfaiter pays 100% of value (minus discount) immediately.
- Forfaiter collects money from Importer's bank on due date.
2. Key Differences: Factoring vs Forfaiting
| Feature | Factoring | Forfaiting |
|---|---|---|
| Scope | Domestic Trade | International Trade (Exports) |
| Risk | Usually Recourse | Always Non-Recourse (100% risk with Forfaiter) |
| Maturity | Short Term (90-120 days) | Medium Term (1-5 years) |
| Coverage | 80% Advance | 100% Discounting |
Summary
- Context: Exports.
- Risk: 100% Non-Recourse.
- Instrument: Avalised Bills of Exchange.
- Benefit: Exporter converts credit sale into cash sale instantly via Forfaiting.
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