Forfaiting In Trade Finance

Forfaiting, the literal meaning is to give up (something) as a necessary consequence of something else. In Trade Finance, “Forfaiting” is a mechanism of financing short to medium terms post-shipment exports.  Capital goods exported usually come with credit terms from the importer , due to which exporter finds issues with his current cash flows. To address this issue, Forfaiting product was introduced in 1960. In simple words, it's a medium term foreign currency loan extended by foreign bank (also termed as forfaiter) against  shipped goods by exporter.Forfaiting is usually carried out by-a. Discounting export receivablesb. Bills of exchanges or promissory notes There are 5 parties involved in Forfaiting-i. Exporter ii. Importer iii. Exporter’s bank iv. Importer’s bank v. The ForfaiterModus operandi :-Post negotiating invoice (referred as sales contract), Exporter approaches Forfaiter ( foreign Bank ) to ascertain contract terms for funding.Forfaiter does due diligence about importer, supply and credit terms, documentation, country risk, credit risk etc.Forfaiter quotes the discounting rate usually quoted in LIBOR/EURIBOR.The Exporter quotes a contract price to the overseas buyer/Importer by adding cost of funds,commitment fee,arrangement fees etc. on the exported goods.Upon acceptance of the above  pricing, Exporter and Forfaiter sign a contract.Export takes place against documents guaranteed by the importer’s bank.Forfaiter discounts the bill and presents the same to the importer’s bank for the payment on due date or even sell it in secondary market. Costs of Forfaiting: Forfaiting typically involves below costsCommitment Fees :-  Ranges between 0.5% -1% PaDiscount Fees :- Interest cost charged in LIBOR/EUROArrangement Fees – Facilitator fees will be charged by Bank/Consultant in India.BENEFITS OF FORFAITING SERVICES The benefits to importer are abundant, some of them are listed here:1)  Seller receives immediate credit of funds in account, thus increasing liquidity position.2) Since risk is borne by the forfaiter, payment default from importer will not affect the Seller.3) Exporter is hedged against any interest rate risk and exchange rate risk since contract is executed at a fixed rate.4) 100 per cent of the invoice/contract value can be credited5) Cost of Forfaiting can be borne by Importer as well , depending on the credit terms.For more details on RBI policy, please refer https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7354#b23
Saurabh Jain
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Forfaiting In Trade Finance

Saurabh Jain
Blog
15th Sep, 2017
Forfaiting In Trade Finance

Forfaiting, the literal meaning is to give up (something) as a necessary consequence of something else. In Trade Finance, “Forfaiting” is a mechanism of financing short to medium terms post-shipment exports.  

Capital goods exported usually come with credit terms from the importer , due to which exporter finds issues with his current cash flows. To address this issue, Forfaiting product was introduced in 1960. In simple words, it's a medium term foreign currency loan extended by foreign bank (also termed as forfaiter) against  shipped goods by exporter.

Forfaiting is usually carried out by-

a. Discounting export receivables

b. Bills of exchanges or promissory notes

 There are 5 parties involved in Forfaiting-

i. Exporter

ii. Importer

iii. Exporter’s bank

iv. Importer’s bank

v. The Forfaiter

Modus operandi :-

  1. Post negotiating invoice (referred as sales contract), Exporter approaches Forfaiter ( foreign Bank ) to ascertain contract terms for funding.

  2. Forfaiter does due diligence about importer, supply and credit terms, documentation, country risk, credit risk etc.

  3. Forfaiter quotes the discounting rate usually quoted in LIBOR/EURIBOR.

  4. The Exporter quotes a contract price to the overseas buyer/Importer by adding cost of funds,commitment fee,arrangement fees etc. on the exported goods.

  5. Upon acceptance of the above  pricing, Exporter and Forfaiter sign a contract.

  6. Export takes place against documents guaranteed by the importer’s bank.

  7. Forfaiter discounts the bill and presents the same to the importer’s bank for the payment on due date or even sell it in secondary market.

 Costs of Forfaiting:

 Forfaiting typically involves below costs

  1. Commitment Fees :-  Ranges between 0.5% -1% Pa

  2. Discount Fees :- Interest cost charged in LIBOR/EURO

  3. Arrangement Fees – Facilitator fees will be charged by Bank/Consultant in India.

BENEFITS OF FORFAITING SERVICES

The benefits to importer are abundant, some of them are listed here:

1)  Seller receives immediate credit of funds in account, thus increasing liquidity position.

2) Since risk is borne by the forfaiter, payment default from importer will not affect the Seller.

3) Exporter is hedged against any interest rate risk and exchange rate risk since contract is executed at a fixed rate.

4) 100 per cent of the invoice/contract value can be credited

5) Cost of Forfaiting can be borne by Importer as well , depending on the credit terms.

For more details on RBI policy, please refer

https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7354#b23


Saurabh
Blog Author

 

One of the Co-founders, Saurabh serves as an active advisor to several SaveDesk’s portfolio companies and also works closely with them to improve business performance, select key management personnel, ensuring statutory and financial oversight and compliance supported by various agreements.Prior to SaveDesk, Saurabh spent seven years with Standard Chartered Bank commercial banking team as an associate director, where he was responsible for client management,financial analysis, portfolio management and large ticket deal’s execution in South India. Saurabh holds an MBA in Marketing from the Institute of Technology Management, and graduated with Honors degree in Electrical and Electronics Engineering from RGPV, Madhya Pradesh

 

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