56 3 Reduction of External Funding Needs
factor is governed, in the absence of choice, by the law of the country where the
export factor has its place of business.^131
There have been some attempts to simplify the legal rules that govern interna-
tional factoring. (a) The purpose of the 1988 Ottawa Convention on International
Factoring was to simplify the assignment of debts in international goods and ser-
vices transactions and to facilitate export financing. However, the Ottawa Conven-
tion has been ratified only by a handful of countries.^132 (b) The United Nations
Convention on the Assignment of Receivables in International Trade was adopted
in 2001. The main objective of the UN Convention is to promote the movement of
goods and services across national borders by facilitating increased access to
lower-cost credit. In order to achieve this objective, the Convention removes legal
obstacles to certain international financing practices such as asset-based lending,
factoring, forfaiting, securitisation, refinancing and project financing. However,
the UN Convention has not yet entered into force.
Forfaiting
Forfaiting means the practice of discounting of individual bills of exchange or
promissory notes originating from commercial business transactions on a non-
recourse basis. Forfaiting is often used for large transactions in export trade.
Forfaiters will sell the bills and notes they have discounted.^133 For example, DF
Deutsche Forfait AG, a German financing company, holds a bill of exchange for
14 days on average before selling it further.^134
The forfaiter purchases account receivables at an agreed discount interest rate.
These are discounted and the net amount is placed at the disposal of the supplier.
The supplier thus receives immediate payment.
The discount reflects the risk the forfaiter is taking. Central to forfaiting is that
the supplier will have drawn the bill “without recourse” and that there is an aval
(see below) or a guarantee on the bill. This will usually be provided by a leading
bank in the buyer’s country. The forfaiter will rely primarily on the guarantee or
aval of the bank in the buyer’s country in the event of non-payment by the buyer.
The guarantee or aval is also necessary for the marketability of the paper, since
without the name of a leading bank on it, the forfaiter would not be able to sell it
in the secondary market. After purchasing the bill of exchange, the forfaiter may
enhance the credit obligation by structuring credits better and/or by taking out
credit insurance.
(^131) Article 4(2) of Regulation 593/2008 (Rome I).
(^132) France, Germany, Hungary, Italy, Latvia, Nigeria, Ukraine. See, for example, Basedow
J, Internationales Factoring zwischen Kollisionsrecht und UNIDROIT-Konvention,
ZEuP (1997) pp 615–642.
(^133) See Cranston R, op cit, pp 382–384.
(^134) Deutsche Forfait will and die Börse. Kapitalerhöhung in zweistelliger Millionenhöhe,
FAZ, 7 May 2007 p 15.