Forfaiting

In trade finance, forfaiting is a financial transaction involving the purchase of receivables from exporters by a forfaiter. The forfaiter takes on all the risks associated with the receivables but earns a margin. The forfaiter may also be immunized from certain risks if the transaction involves payment by negotiable instrument. The forfaiting is a transaction involving the sale of one of the firm's transactions. Factoring is also a financial transaction involving the purchase of financial assets, but factoring involves the sale of any portion of a firm's receivables.

The characteristics of a forfaiting transaction are:

At its simplest, the receivables should be evidenced by a promissory note, a bill of exchange, a deferred-payment letter of credit, or a letter of forfaiting.

Three elements relate to the pricing of a forfaiting transaction:

The benefits to the exporter from forfaiting include eliminating political, transfer, and commercial risks and improving cash flows. The benefit to the forfaiter is the extra margin on the loan to the exporter.

The International Trade & Forfaiting Association (ITFA) was founded in 1999 as a worldwide trade association for the forfaiting industry with a cash contribution of the VEFI (VEFI, founded in 1978 is the oldest forfaiting association in the world). Its purpose is to develop business relationships and assist other forfaiting-related organizations.

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