The Treasurer’s Guide to Trade Finance

A Reference Guide to Trade Finance Techniques

Advantages

There are a number of advantages for the
exporter in raising funds through forfaiting.
ƒ The exporter accelerates the collection
of cash and the facility is without
recourse, so it does not have to accept a
contingent liability.
ƒ There are potential cash flow benefits
for the whole supply chain, as the
exporter can offer the importer
longer payment terms, subject to the
agreement with the forfaiter.
ƒ The exporter is able to transfer the risk
associated with the transaction to the
forfaiter. This includes managing the
country risk associated with the importer’s
jurisdiction and the credit risk associated
with the importer.
ƒ At the same time, the exporter is able
to fix the exchange rate associated with
the transaction and manage the interest
rate. Forfaiting agreements are usually
based on fixed interest rates, as the rate
of discount of bills is usually fixed for the
term of the contract.
ƒ There can be accounting benefits
associated with shifting accounts
receivable to the forfaiter. These will
depend on the terms of the agreement.
ƒ The forfaiter collects payment from the
importer under a financial instrument rather
than an invoice. This means the forfaiter is
immune from any dispute over the contents
of the consignment such as, for example,
whether faulty products were supplied.
ƒ The forfaiter is responsible for accounts
receivable, so this function is effectively
outsourced. The exporter will benefit
from the forfaiter’s expertise in managing

accounts receivable, especially with

respect to achieving early warning of

potential counterparty problems.

Disadvantages

As with any other form of financing, there are

disadvantages to the use of forfaiting.

ƒ Forfaiting can be relatively expensive,

although the service does effectively

include a debt collection/accounts

receivable team.

ƒ Forfaiting is disclosed to the company’s

customers, which may weaken the

relationship. The company may find it

difficult to build a relationship with the

importer over time, leading to reliance on

the forfaiter.

ƒ Care needs to be taken over the

preparation of the documentation. The

forfaiter may refuse to release funds

if there are discrepancies within the

documentation.

ƒ For usual transactions (where the entity

issuing the documents to be discounted

does not enjoy a very high credit rating),

an institution needs to guarantee the

documents before a discounter will be

interested. Without such a guarantee,

forfaiting may not be possible.

Evaluation

Forfaiting is a useful technique for raising

finance whilst also managing many of the

risks associated with international trade.

The costs of forfaiting can be quite high,

especially if the exporter’s customers

represent a significant credit risk. Because it

is an established technique, structures can

be documented and agreed quickly.