Definition of Forfaiting

Forfaiting is a specialized form of trade finance that allows the exporter to offer  extended credit to the importer. Under forfaiting  , the importer gives the  exporter a bundle of bills of exchange or promissory notes covering the principal  amount as well as the interest. Each tranche of the notes fall due at different points of  time in the future, e.g. every six months, extending up to several years. The notes are  backed by an aval or guarantee provided by a reputed bank in the importer’s country.  The exporter can then discount these notes without recourse with banks who  specialize in the forfaiting business to generate an immediate cash flow. This means  that if either the importer or the guaranteeing bank fails to pay when notes fall due,  the forfaiter cannot ask the exporter for reimbursement. The credit risk is assumed  entirely by the forfaiter. The forfaiter in turn, may hold the notes in its own portfolio  or sell different tranches in the secondary market (obviously at a discount smaller  than what was charged to the exporter).  Forfaiting tends to be a specialized business because each  underlying export-import transaction generally has unique features.

Forfaiting Process

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