Forfaiting

Forfaiting is a form of export finance in which a bank or specialist firm, the forfaiter, buys an exporter's future payment claims on a foreign buyer at a discount and without recourse to the exporter. The claims are usually a series of bills of exchange or promissory notes, a deferred payment obligation under a usance letter of credit, or a receivable backed by a bank guarantee. The exporter receives cash at once and is freed from the buyer's credit risk, country risk and interest-rate risk.

The name comes from the French à forfait, meaning surrendering rights. Forfaiting is closely related to factoring without recourse, but it usually handles fewer, larger and longer receivables, each backed by a bank. Since 1 January 2013 transactions can be made subject to the ICC Uniform Rules for Forfaiting (URF 800).

Suppose a friend owes you money in instalments over the next three years, and a well-known bank has signed each IOU to say it will pay if your friend does not. You need the money now, so you sell the IOUs to an investor. The investor pays you less than their face value, because it is waiting for its money, and from that moment any problem collecting is the investor's, not yours.

That is forfaiting. The exporter is the person holding the IOUs, the importer is the friend, the importer's bank is the signer, and the forfaiter is the investor. The exporter gets something close to a cash sale, while still letting the buyer pay over time.

1. The exporter and importer agree a sale on deferred terms, for example payment in six half-yearly instalments, a common structure for supplier credit on capital goods.
2. Before signing, the exporter asks a forfaiter for a quote and a commitment, so it can build the financing cost into its price.
3. The importer issues promissory notes or accepts bills drawn by the exporter, and its bank guarantees them, either by a separate guarantee or by adding an aval (a signature on the instrument itself).
4. After shipment, the exporter endorses the instruments to the forfaiter "without recourse" and receives the discounted amount.
5. At each maturity the forfaiter presents the instrument to the guarantor bank for payment.

The exporter remains responsible only for the validity of the claim: that the debt exists, that the documents are genuine and that the guarantee is enforceable. If the goods were never shipped or the paperwork is forged, the forfaiter can still look to the exporter.

Forfaiters quote a fixed discount rate, usually a benchmark such as SOFR plus a margin reflecting the guarantor and its country, and may add grace days for payment delays and a commitment fee. A common method, "discount to yield", gives the amount paid to the exporter for each instrument:

• $P$ is the purchase price paid to the exporter.
• $F$ is the face value of the bill or note.
• $r$ is the annual discount rate, written as a decimal.
• $d$ is the number of days to maturity, including any grace days.

For a $1,000,000 note maturing in 180 days, discounted at 7% a year: $P = 1{,}000{,}000 \div (1 + 0.07 \times 0.5) = 1{,}000{,}000 \div 1.035$, or about $966,184. The simpler "straight discount" method would give $1,000,000 × (1 − 0.035) = $965,000, a slightly lower price for the same quoted rate, so the method must be agreed. The effective cost to the exporter is the discount rate together with fees, measured using the time value of money.

In factoring with recourse, by contrast, the seller still carries the credit loss; see factoring with recourse. Forfaiting is also distinct from export bill discounting by the exporter's own bank, which is often with recourse.

Forfaiting grew from the 1950s and 1960s, when Swiss and German banks financed capital-goods exports to Eastern Europe and later to developing countries. Today forfaiting desks sit in large trade banks, and a secondary market lets primary forfaiters sell the instruments on to other banks and funds. URF 800, prepared by the ICC with the International Trade and Forfaiting Association (ITFA), standardises the commitment, the documents the seller must deliver and the treatment of the primary and secondary sale. Forfaiters still examine the guarantor, the country's capital controls and sanctions exposure, and the transaction's trade authenticity verification, because fraud in the underlying trade is a known risk.

• International Chamber of Commerce
• International Trade and Forfaiting Association (ITFA)