Forfaiting Short to Intermediate Term Financing

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ForfaitingShort to Intermediate Term Financing

• Chapter 18
• International Finance
• Supplementary Material

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FORFAITING (Medium-Term Capital Goods Financing)

• Forfaiting means selling a bill of exchange, at a
  discount, to a third party, the forfaiter.
• The forfaiter collects the payment from an
  overseas customer, through a collateral bank(s)
• The forfaiter assumes the underlying
  responsibility of exporters and simultaneously
  providing trade finance for importers by
  converting a short-term loan to a medium term
  one.
• Forfaiting is the discounting of international
  trade receivables on a without recourse basis.

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FORFAITING (Medium-Term Capital Goods Financing)

• Characteristics
• The exporter extends credit for period ranging
  between 180 days to 7 years.
• Minimum bill size should be US 250,000 (US
  500,000/- is preferred)
• The payment should be receivable in any major
  convertible currency.
• A Letter of Credit, or a guarantee by a bank,
  usually in importer's country.
• The contract can be for either goods or services.

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FORFAITING (Medium-Term Capital Goods Financing)

• Documentation
• At its simplest, the receivables must be backed
  by any of the following debt instruments
• Promissory Note ( a note payable)
• Bill(s) of Exchange
• Deferred payment letter of credit
• A bank letter of guarantee

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FORFAITING (Medium-Term Capital Goods Financing)

• Pricing
• Discount Rate LIBOR plus margin
• Days of Grace cover b-days until settlement
• Commitment Fee to cover exposure days
• Benefits
• Eliminates risks like political, transfer and
  commercial risks
• Enhances competitive advantage.
• Ability to provide vendor financing making
  products more attractive
• Enables the exporter to do business in risky
  countries.
• Increases cash flow. Forfaiting converts a
  credit-based transaction in to a cash transaction.