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Forfaiting - an alternative method of financing international trade - April 2013

The influx of foreign owned banks in Malta has added dynamism to the island’s thriving financial services industry, which has also been increasing the range of products and services offered in and from Malta. Amongst these one finds the increasing range of trade finance products, which include Forfaiting.

Traditional forfaiting is a form of international supply chain financing, which involves the discounting of future payment obligations, usually evidenced by negotiable instruments, on a without-recourse basis.  The buyer (the “forfaiter”) of the negotiable instrument/s assumes the risk of non-payment of the instrument. Forfaiting is a flexible discounting technique that can be tailored to the needs of a wide range of counterparties in the provision of finance to the international trade community and focuses on the sale of an exporter's accounts receivable, particularly with regard to capital goods, commodities or other high-value export transactions, with tenors that could range from 90 days to 7 years. Today, forfaiting is a mainstream trade finance product, with numerous applications. A wide range of goods and services are regularly financed by the forfaiter through creative use of forfaiting, including commodities, services, project finance, turn-key plants, and even the transfer fees for professional athletes. Contract values that can be financed through forfaiting may range from US$100,000 to US$100 million.

The International Chamber of Commerce (ICC) recently issued its Uniform Rules For Forfaiting (URF 800) in which it recognizes that forfaiting has evolved over the past 20 years from its traditional offering of without-recourse discounting of international trade receivables.  The ICC notes that modern forfaiting is a much broader product encompassing many more instruments, structures and concepts and is recognized as offering a versatile and flexible approach to raising finance for international trade with benefits for both providers and recipients of finance. 

What are the benefits of Forfaiting? Forfaiting provides financing for 100% of the contract value and eliminates political, transfer and commercial risks. It also protects against the risks of interest rate increases and exchange rate fluctuation. Forfaiting enables sellers to do business in countries where the risk of non-payment would otherwise be too high, and offers them the possibility to improve their company’s cash flow. This means that sellers can offer better credit terms to their clients and therefore be more competitive. Moreover, it removes accounts receivable from the balance sheet and relieves the seller of the administration and burden of collection. Forfaiting is also a very fast form of financing. Tailor-made financing solutions can be structured quickly through the adoption of concise and straightforward documentation.

Wherever possible, exporters should secure negotiable instruments, which are unconditional, irrevocable and freely transferable, such as promissory notes or bills of exchange, as evidence of the debt. These instruments are sold without recourse. This is a significant benefit since the exporter who sells them can effectively remove itself from any further involvement with the financial aspects of the transaction, including the risk as well as the administration and collection which is very similar to factoring. In fact many confuse forfaiting with factoring. The main difference is that in factoring a company sells all or a portion of its receivables while in forfaiting the company could just sell one of its transactions/receivables.

Forfaiting offers considerable benefits for both providers and recipients of finance. It is a versatile and flexible approach to raising finance for international trade since it facilitates and enables the provision of finance to the international trade community. There is no doubt that forfaiting has a bright future ahead of it since it is not merely a safer way of doing business but an effective way to open up new markets.

The International Forfaiting Association (IFA), the worldwide trade association for commercial companies, financial institutions and intermediaries engaged in forfaiting will be organizing its Annual Forfaiting Conference in Malta between the 11 and 13 September 2013. FIMBank’s fully owned subsidiary, London Forfaiting Company Ltd is the Gold Sponsor of this Event.