What is international forfaiting?
International forfaiting is a type of financing that facilitates the export of goods and services. Specifically, using forfaiting, a financial institution purchases, with or without recourse, a payment instrument such as a promissory note or a bill of exchange from the assignor, the origin of which is a commercial transaction to buy a good or service.
As such, the bank buys the exporter's or seller's collection right over the importer or buyer, originating from the sales with deferred payment from the former to the latter. In the without recourse mode, any non-payment by the liable party shall be paid in full by the bank that offers the financing. Therefore, international forfaiting makes medium and long term credits and transactions with deferred payment effective immediately.
Benefits of international forfaiting
This method of financing has a series of benefits for the exporter or seller:
- Liquidity: makes it possible to collect payments for international sales in cash, and not use lines of credit that it may be available with the bank.
- Avoid credit risks due to non-payment by the importer or buyer in the without recourse mode, and market risks due to interest and exchange rate fluctuations.
- Simplicity: the process is relatively simple, with very little required documentation; forfaiting eliminates administrative expenses and reduces the costs associated with collection management.
- Know the financial cost of the transaction from the very start.