Forfaiting is a mechanism where the exporter surrenders his rights to receive payment against the goods and services rendered to the importer in exchange for a cash payment from the forfaiter.
It is a financing option used by the exporters to get immediate cash.
A forfaiter is typically a bank or a financial firm that specializes in export financing.
Forfaiting arrangements are always without recourse , which means that the exporter is not liable for any risk of non payment by the importer. The entire risk will be borne by the forfaiter.
PROCESS OF FORFAITING
Forfaiting is a means of financing which involves an agreement between the exporter & a forfaiter who is a specialist in trade finance.
The forfaiter agrees to purchase the receivables at a discount & makes payment of the entire amount of the receivables immediately.
The importer will then pay the full value of the receivables to the forfaiter on the agreed date.
In this way the exporter can easily convert a credit sale into a cash sale, without recourse to him or his forfaiter.
ADVANTAGES OF FORFAITING :
- It provides immediate funds to the exporter who is saved from the risk of the defaulting importer.
- It can also serve as an alternative to export credit and credit insurance.
- As forfaiting provides 100% finance to exporter against his exports, he can concentrate on his other exports.
- It also protects the exporters against credit risks, transfer risk, risks posed by foreign exchange rates or interest rate changes etc.
DISADVANTAGES OF FORFAITING
- Forfaiting is not available for deferred payments especially while exporting capital goods for which payment will be made on a deferred basis by the importer.
- It is usually more expensive than other forms of commercial financing.
- Forfaiters may not operate in high–risk regions, and not all banks will be accepted as suitable guarantors.
Thus, in simple words Forfaiting is a financing option exporters use to receive immediate cash by selling their receivables at a discounted price to the forfaiter (financial intermediary).