How does forfeiting work in international trade?

Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their medium and long-term foreign accounts receivable at a discount on a “without recourse” basis. – Exporters can offer medium and long-term financing in markets where the credit risk would otherwise be too high.

What is forfeiting in financial services?

Forfaiting is a means of financing that enables exporters to receive immediate cash by selling their medium and long-term receivables—the amount an importer owes the exporter—at a discount through an intermediary. A forfaiter is typically a bank or a financial firm that specializes in export financing.

What are the cost elements in forfeiting?

A forfeiting transaction has typically three cost elements: Commitment fee. Discount fee. Documentation fee.

How does a forfaiting work for an exporter?

Forfaiting is a mechanism where the exporter surrenders his rights to receive payment against the goods and services rendered to the importer in exchange for a cash payment from the forfaiter. Through forfaiting, the exporter can easily convert a credit sale into a cash sale, without recourse to him or his forfaiter.

Which is an example of a forfaiting process?

Forfaiting Definition Forfaiting is a method of obtaining medium-term funds for a business involved in international trade. The process consists of a company engaged in exporting the capital goods, selling foreign accounts receivables like promissory notes or bills of exchange, and immediately receiving the financing.

What are the benefits and risks of forfaiting?

Forfaiting eliminates the risk that the exporter will receive payment. The practice also protects against credit risk, transfer risk, and the risks posed by foreign exchange rate or interest rate changes.

How are trade finance instruments used in Forfaiting?

In other words, forfaiting is discounting of trade‐related receivables secured with trade finance instruments such as bills of exchange, promissionary notes or deferred payment letter of credit. In the U.S., forfaiting is known as “structured trade finance”, and every year more than USD 300 billion of world trade takes place using forfaiting.