2. INTRODUCTION
• Forfaiting as a financing concept has been in use across
the world since the 1960s. “Forfait” is derived from
French word ‘A Forfait’ which means surrender of fights.
• The Government of India has recently permitted a new
form of post shipment financing called Forfaiting as
part of its efforts to promote exports from the country
3. • Forfaiting is a mechanism by which the right for export
receivables of an exporter (Client) is purchased by a
Financial Intermediary (Forfaiter) without recourse to him.
• Such receivables include Letters of Credit (with or without
Bills of Exchange) Promissory Notes ,Bill of Exchange,
Bank Guarantees Payable to an Exporter in one country
from an Importer in another country.
4. CHARACTERISTICS OF FORFAITING
It Converts Deferred Payment Exports into cash
transactions, providing liquidity and cash flow to
Exporter.
It solves Exporter from Cross-border political or
conversion risk associated with Export
Receivables.
Finance available upto 100% (as against 75-80%
under conventional credit) without recourse.
Provides Fixed Rate Finance and hence risk of
interest rate fluctuation does not arise.
5. Exporter is freed from credit administration.
Provides long term credit unlike other forms
of bank credit.
Less costly.
Simple Documentation as finance is available
against bills.
Forfait transactions are confidential.
6. Forfaiting comes with the following
terms and conditions:
• There is a discounting of the amount to be
received from the importer
• Discounting is on a fixed rate
• Debt is in the form of bills of exchange or
promissory notes guaranteed by a bank
• Such financing is without recourse to the
seller
• 100% of the amount receivable can be
financed in this manner
7. Advantages
100 per cent financing
Improves cash flow
Reduced administration cost
Increased trade opportunity
Eliminates the risk of non-payment
Risk elimination (Exchange risk, and political
risks etc)
8. Disadvantages
It is very expensive (banks take high fees due
to high risks)
Not available for short period
Not available in financially week country
9. Costs Involved in Forfaiting
Commitment Fee:- Payable to Forfaiter by Exporter in
consideration of forfaiting services.
Commission:- Ranges from 0.5% to 1.5% per annum.
Documentation Fee:- where elaborate legal
formalities are involved.
Service Charges:- payable to Bank.
10. Conclusion
Forfaiting, or Medium-Term Capital Goods
Financing, means selling a bill of exchange, at
a discount, to a third party, the Forfaiter, who
collects the payment from an, essentially,
overseas customer, through a collateral
bank(s).
