Forfaiting Short to Intermediate Term Financing Chapter 18 International Finance Supplementary Material

FORFAITING (Medium-Term Capital Goods Financing) Forfaiting means selling a bill of exchange, at a discount, to a third party, the forfaiter. The forfaiter collects the payment from an overseas customer, through a collateral bank(s) The forfaiter assumes the underlying responsibility of exporters and simultaneously providing trade finance for importers by converting a short-term loan to a medium term one. Forfaiting is the discounting of international trade receivables on a without recourse basis.

FORFAITING (Medium-Term Capital Goods Financing) Characteristics: –The exporter extends credit for period ranging between 180 days to 7 years. –Minimum bill size should be US$ 250,000 (US$ 500,000/- is preferred) –The payment should be receivable in any major convertible currency. –A Letter of Credit, or a guarantee by a bank, usually in importer's country. –The contract can be for either goods or services.

FORFAITING (Medium-Term Capital Goods Financing) Documentation: At its simplest, the receivables must be backed by any of the following debt instruments: –Promissory Note (~ a note payable) –Bill(s) of Exchange –Deferred payment letter of credit –A [bank] letter of guarantee

FORFAITING (Medium-Term Capital Goods Financing) Pricing –Discount Rate: LIBOR plus margin –Days of Grace: cover b-days until settlement –Commitment Fee: ~ to cover exposure days Benefits: –Eliminates risks like political, transfer and commercial risks –Enhances competitive advantage. Ability to provide vendor financing making products more attractive Enables the exporter to do business in risky countries. –Increases cash flow. Forfaiting converts a credit-based transaction in to a cash transaction.