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| FORFAITING |
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| Forfaiting can be described as the private placement
of medium and long term trade receivables. Generally it
is non recourse to the seller. A typical example is
where an exporter, say a US company, has made a large
sell to a foreign entity or country and the US Exim Bank
has not insured 100% of the receivable. In this
scenario, the Exporter finds a Forfaiter who purchases
without recourse the uninsured portion of the
receivable. Prior to this, the Forfaiter has sold the
receivable to another entity often a foreign bank that
is comfortable with the end buyer corporate and
sovereign risk. Generally the receivable will be
represented by a draft which will have the ‘Aval’ or
guaranty of the end buyer or a bank. |
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Forfaiting unlike Factoring is more involved
with longer tenor cross border transactions. The
documentation is different from a factoring
transaction as Forfaiting has elements of
private placement, often a guaranty, different
types of notifications, and different settlement
methodology.
Some of the larger players, several years back,
almost folded with the financial crisis in the
late ‘90s mainly due to the fact that they were
holding on to the papers rather than placing
them immediately. |
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More and more smaller and shorter term
transactions are now being done by Forfaiters
generally for cross border transactions.
Examples of financial obligations that are
Forfaited include: |
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Promissory Note that is issued by the Importer
and is an obligation to the pay the Exporter. |
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Bills of Exchange which is drawn by the Exporter
and accepted by the Importer. |
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Book Receivables are an amount due to an
Exporter that is not evidenced by a negotiable
instrument but is backed by a separate letter of
guaranty or letter of credit. |
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The Forfaiter purchases one of the above
financial instrument form the Primary holder and
will then place or sell in the Secondary Market
and make a spread between what the Forfaiter
paid the Primary holder and what he can get from
the Secondary buyer. This spread or income to
the Forfaiter is obtained by using different
methods of discounting designed to yield the
Forfaiter a certain desired return. |
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Some of the main risks involved in Forfaiting: |
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Transaction Risks: Since
Forfaiting is non recourse financing it is
important that the negotiable instrument that is
being forfeited is abstracted from the
underlying sales contract so that there are no
lingering non performing risks such as quality
or quantity of goods, delay or non delivery,
time or place of delivery, etc. |
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Risk that the Guarantor will remain
viable. That the guarantee is
irrevocable, unconditional, transferable, and
completely abstract from the underlying
commercial transaction in every way. |
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Sovereign Risks that the
importers country will have enough foreign
exchange to pay the obligation. That there is
clear evidence that the payment will be made in
a freely convertible currency free from any
deduction or taxes |
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Documentation risks: whether
the signatures are confirmed by an acceptable
entity such as a bank, whether any cross border,
political, economic, legal, local regulations,
change of regulations of laws or regulations,
etc. are risks are covered. |
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Safe Custody: Risk of the loss,
theft or misappropriation of the negotiable
instrument. |
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Contact Ashford
Finance for creative trade finance solutions and
forfaiting needs. |
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Financing
Application
(pdf version, click
to view, complete and print)
If you have valid Purchase
Orders and you are unable to obtain funding to purchase the goods
call Ashford Finance for 100% funding. |
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