Forfaiting
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Forfaiting is a financial mechanism where exporters sell their trade receivables to a third party, usually a bank, allowing them to receive immediate cash while the third party takes on the risk of collecting payment from the importer. This method offers advantages such as reduced risk of non-payment and the ability to provide longer credit terms, but it comes with higher costs and is generally limited to substantial projects. Overall, forfaiting serves as an important funding source for exporters engaging in international trade.
Forfaiting
- 2. 1. Meaning 2. Key Points 3. How it Works? 4. Advantages 5. Limitations 6. Reference Content
- 3. In forfaiting, exporters sell their trade receivables from the importers to a third party. This means that the exporters exchange their trade receivables with a third party for cash. Receiving payment from the importers then becomes the job of that third party who purchased the receivables. This forfaiting is usually done by banking and financial institutions who specialize in import export financing. Meaning
- 4. • Excellent source of funds for exporters. • Forfeiters finance medium and long-term bills receivables. • Forfeiters usually do not take contracts valuing less than $2,50,000. • Forfeiters seek a guarantee from the importer’s bank. Such a guarantee is provided by the Importer’s bank in the form of a letter of credit. • Forfaiting companies can finance the project in any of the major currencies. Key Points
- 5. 1. The exporting firm approaches a forfeiter before agreeing to a deal with the importer. 2. Once the bank agrees to finance the deal and sets a discount rate to finance the project, the exporters usually incorporate the amount of discount rate in the deal price. 3. Once the importer agrees to the terms and signs the deal, the exporter gets a commitment from the bank. 4. The exporter then delivers the goods to the importer as per the terms of the contract. 5. The exporter produces the necessary documents including bills receivables before the bank. 6. Upon verification, the bank discounts the trade receivable and pays the exporter. 7. Upon maturity of the trade receivable, the bank collects the payment from the importer. How it Works?
- 6. • Sets the exporter free from the risk of non-payment by the importer. • Shields the exporter from the adverse risk arising due to foreign exchange rate fluctuations. • Forfaiting makes for an easy source of funds for exporters. • Helps exporters to offer longer credit terms to their foreign customers. Advantages
- 7. • Forfeiters charge considerably for undertaking this risk which is higher than other commercial credit charges. • Forfeiters typically chose to finance only those projects which come from major developed economies. Limitations
- 8. Reference To know more about it, click on the link given below: https://efinancemanagement.com/financial-accounting/forfaiting