Forfait Your Trade Finance Instrument

If you import or export goods on a regular basis, selling or buying in other currencies you will know how factors beyond your control such as currency and interest rate movements can eat into your profit margins. However, there is a solution. In certain situations you can protect yourself against these factors using forfaiting. Here is how it works.

What is Forfaiting?

This is a method of discounting “trade receivables” on a “non recourse” basis. In other words, if your company exports goods or services abroad, forfaiting is simply a way of allowing you to receive a large part of the payment owing for them straight away. Using forfaiting allows you to release some of the value tied up in exported goods and also allows you to protect against fluctuations in currency and interest rates.

How it works…

With forfaiting, the forfaiter purchases the actual trade instrument, for example a letter of credit. The mechanics are broadly similar to invoice discounting in that the forfaiter purchases the instrument at its cost plus a margin for the term required and pays you a substantial portion when you submit the necessary paper work and the rest minus any commission charges, once they have collected it from your buyer.

The size of the discount you achieve, that is the percentage of the full amount you will be paid at the start, will be affected by the size of the contract, the type of product you are selling, the importing country and the quality of the guaranteeing bank.

When can Forfaiting be used?

Typical receivables suited to forfaiting include, Bills of Exchange, Letters of Credit and Promissory Notes, all backed up by a guarantee or Aval from a bank. Though forfaiting originally developed from the need to bridge the gap between exporters and importers of capital goods the range has broadened and you can now secure forfaiting on commodities, consumer equipment and technology.

Setting up Forfaiting

If you want to set up forfaiting check that it is available, what percentage payment you will receive and determine any requirements early on so you can negotiate price – and any credit period – with your buyer based on the likely cost of forfaiting. You should also ensure that the trade instrument you select is set up in an acceptable way and that the guaranteeing bank is acceptable.

The Advantages of Forfaiting

There are several advantages to forfaiting for both exporters and importers. These can be summarised as follows.

Advangates of Forfaiting for exporters:-

• Early payment, if you are exporting goods you will be paid on submission of the agreed documentation at the agreed discount.
• It lowers your risk - you can remove exchange, currency credit and transfer risks by forfaiting.
• Nobody has to know. Forfaiting can be carried out on a confidential basis. • Finance is secured against documentation on a “without recourse” basis.
• It reduces your admin – since the forfaiter will be collecting the payment rather than you.

Advantages of Forfaiting for importers:-

• You can purchase goods on finance at competitive rates.
• Your exporter will be able to offer you credit and a repayment plan tailored specifically to your situation or requirements.
• It allows you to “fix” your interest rates because the total finance costs are known in advance.
• It lets you source goods from a number of countries