What Is Forfaiting?

Mary McMahon
Mary McMahon

Forfaiting is a practice that allows exporters to sell their receivables to a third party known as a forfaiter. The exporter receives immediate funds to cover transactions, which limits risk and cleans up its account books. The importer can enter a credit agreement with the forfaiter to get goods on credit and repay it over terms varying from 180 days to five years or more. This allows goods and services to move freely through the international supply chain.

Type of goods and length of payment period influence the forfaiting method of financing exports.
Type of goods and length of payment period influence the forfaiting method of financing exports.

International trade can be tricky, as all parties to transactions want guarantees that the other end will meet its obligations. One option is credit through a bank which pays exporters on behalf of the importer, or which guarantees funds. Other options can include the use of escrow accounts and similar measures. Forfaiting is one among a library of options available to finance transactions that occur across international borders.

The process starts with the sale of individual transactions to the forfaiter. Forfaiters can ask to review the terms of the transaction and the parties involved to determine if it is a reasonable risk. They take on the obligations on a no recourse basis, which means that if the importer does not pay, the forfaiter cannot turn to the exporter to make good on the transaction. This means that financial institutions need to be careful in forfaiting transactions, to avoid exposing themselves to unnecessary risk.

Most forfaiting transactions are large, in excess of $100,000 United States Dollars (USD) or more, with some firms having a $500,000 USD minimum. Smaller amounts are not worth the expense associated with processing and originating these financial transactions, from the point of view of financial institutions. The forfaiter charges interest, the terms of which may vary depending on the current prime rate and the credit profiles of the parties to the transaction.

Forfaiting is very similar to factoring, where companies sell receivables to a third party at a discount to access immediate cash. The process of forfaiting, however, concerns export transactions specifically, and does not apply to other kinds of accounts receivable. Some financial institutions offer both services to their clients along with other options for financing transactions and managing receivables balances. For large companies, having big outstanding receivables can create a financial liability. Investors and other companies may be unwilling to do business when a company is owed a lot of money but doesn't have very much in hand because it is waiting on receivables.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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