Forfaiting

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In trade finance, forfaiting is a service providing medium-term financial support for export/import of capital goods. The third party providing the support is termed the forfaiter. The forfaiter provides medium-term finance to, and will commonly also take on certain risks from, the importer; and takes on all risk from the exporter, in return for a margin. Payment may be by negotiable instrument, enabling the forfaiter to lay off some risks. [1] Like factoring, forfaiting involves sale of financial assets from the seller's receivables. Key differences are that forfait supports the buyer (importer) as well as the seller (exporter), and is available only for export/import transactions and in relation to capital goods. [2] The word forfaiting is derived from the French word forfait, meaning to relinquish the right (in this case, the exporter's right to receive payment from the customer — the importer). [3]

Contents

Characteristics

The characteristics of a forfaiting transaction are:

At its simplest, the receivables should be evidenced by a promissory note, a bill of exchange, a deferred-payment letter of credit, or a letter of forfaiting. [4] [5]

Pricing

Three elements relate to the pricing of a forfaiting transaction:

The benefits to the exporter from forfaiting include eliminating political, transfer, and commercial risks and improving cash flows. [7] The benefit to the forfaiter is the extra margin on the loan to the exporter.

Professional associations

The oldest forfaiting association in the world is VEFI, the Association of Forfaiters in Switzerland (German : Vereinigung von forfaitierenden Instituten in der Schweiz), which was founded in 1978. [8] The International Trade & Forfaiting Association (ITFA) [9] was founded in 1999 as a worldwide trade association for the forfaiting industry with a cash contribution from VEFI. [10] Its purpose is to develop business relationships and assist other forfaiting-related organizations. [11]

See also

Related Research Articles

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References

  1. A.I. Trade Finance, Inc. v. Laminaciones de Lesaca, S.A., 41 F.3d 830 (2d Cir. 1994).
  2. J. Downes, J.E. Goodman, "Dictionary of Finance & Investment Terms", Baron's Financial Guides, 2003; and J.G. Siegel, N. Dauber & J.K. Shim, The Vest Pocket CPA, Wiley, 2005.
  3. Treasury Today, Forfaiting, published September 2008, accessed 7 July 2018
  4. "What Forfaiting Means for Importers and Exporters". Investopedia. Retrieved 2021-09-11.
  5. "Bills of Receviables, Bills of Exchange & Promissory note | OracleUG". www.oracleug.com. Retrieved 2021-09-11.
  6. Pathak, Bharati V. (2010). The Indian Financial System: Markets, Institutions and Services. Pearson Education India. ISBN   978-81-317-2817-8.
  7. "Foreifting and Factoring Benefits for Exporters and Exporter's Banker". www.eximguru.com. Retrieved 2021-09-11.
  8. Welcome to the VEFI-Website!, accessed 7 July 2018
  9. Digital, Logix. "ITFA" . Retrieved 7 March 2017.
  10. "» About Us" . Retrieved 2021-09-11.
  11. "Guidelines on Risk Factors_EN_04-01-2018.pdf" (PDF).