What Is Forfaiting?

Forfaiting, or "without recourse" financing, is a method of trade finance whereby the forfaiting bank purchases, on a without recourse basis, unconditional debt obligations arising from the supply of goods and/or services.

In a forfaiting transaction, the exporter agrees to surrender the rights to claim for payment of goods or services delivered to an importer under a contract of sale, in return for a cash payment from a forfaiting bank. In exchange for the payment, the forfaiting bank takes over the exporter's debt instruments and assumes the full risk of payment by the importer. The exporter is thereby freed from any financial risk in the transaction and is liable only for the quality and reliability of the goods and/or services provided.

Forfaiting was born in the early 1960’s in West Germany, out of the need for West German manufacturers to sell capital goods to the East European communist economies. The East European communist economies had very little hard currency available to them, so the West German manufacturers were offering them medium term credit, some times for up to 5 years. An East European state bank usually guaranteed the trade credits.
When the West German Manufacturers needed cash on hand they sold their trade credit paper assets at a discounted rate to Central European financiers. That was the birth of the forfaiting finance.

Forfaiting is a flexible product and can be modified to suit the exporters particular requirements, enabling them to receive a lump sum payment shortly after the delivery of goods.

In the context of international trade finance, forfaiting can be used as an alternative to export credit or insurance cover, especially for those transactions in which the export credit agency is not open to a particular country and/or bank.

Characteristics And Instruments Used

• The buyer's obligation is usually supported by a local bank guarantee and in some countries guaranteed by the government.
• Documentation is simple. It requires evidence of the underlying transaction, copies of shipping documents and confirmations from the obligor/guaranteeing bank.
• Transactions can be set on a fixed or floating interest rate basis. 
• The exporter will receive the funds upon presentation of all necessary documents, shortly after shipment of goods.
• Debt is evidenced by bills of exchange, promissory notes or a letters of credit.

See the benefits of forfaiting finance.