Forfaiting

What it means

Forfaiting is the purchase of a single medium or long-term export receivable without recourse to the exporter. The forfaiter buys it at a discount and takes on the risk that the buyer never pays.

It differs from factoring in size and in risk: factoring is rolling finance for short invoices out of a portfolio, often with recourse, while forfaiting is one large deal with a long maturity and no recourse.

Legally, forfaiting is a special case of the assignment of a receivable. The discount combines interest for the whole period to maturity with a margin for the risk of the buyer’s country and bank. It is fixed at signing, so the exporter knows exactly what it will receive, and the risk of rates moving before maturity no longer sits with it.

How it works in practice

The receivable has to be firmly documented: usually embodied in a bill of exchange with a bank aval, covered by a letter of credit or a bank guarantee. The price follows the creditworthiness of the buyer and its bank, not that of the exporter.

In the books it is an assignment: the receivable leaves the balance sheet and the discount and fees go to financial expenses of the period. VAT on the original supply is unchanged; what changes is who owns the claim and when the exporter has the cash.

The exporter asks for the forfaiter’s quote before signing the contract, because the discount has to be built into the price quoted to the buyer. Before paying out, the forfaiter wants the contract, the invoice, the transport documents and a confirmed aval or guarantee. We help put these together so that amounts, dates and names agree across every paper.

What to watch out for

The words without recourse protect only against the buyer being insolvent. If the buyer refuses to pay over a defect in the delivery or an error in the documents, the forfaiter comes back to the exporter, who repays the whole sum and never sees the discount again.

If the contract with the buyer prohibits assignment, the assignment is invalid under the Civil Code and the forfaiter either refuses the receivable or later asks for its money back. The ban is often buried in the buyer’s general terms and conditions, so they need reading before the contract is signed, not when the receivable is being sold.