{{Short description|Financial support for export/import}} {{distinguish|Forfeiting (disambiguation)}} {{More citations needed|date=November 2009}} In trade finance, '''forfaiting''' is a service providing medium-term financial support for export/import of capital goods. The third party providing the support is termed the forfaiter. The forfaiter provides medium-term finance to, and will commonly also take on certain risks from, the importer; and takes on all risk from the exporter, in return for a margin. Payment may be by negotiable instrument, enabling the forfaiter to lay off some risks.<ref name="A.I. Trade">''A.I. Trade Finance, Inc. v. Laminaciones de Lesaca, S.A.'', 41 F.3d 830 (2d Cir. 1994).</ref> Like factoring, forfaiting involves sale of financial assets from the seller's receivables. Key differences are that forfaiting supports the buyer (importer) as well as the seller (exporter), and is available only for export/import transactions and in relation to capital goods.<ref name="CPA_Finance">J. Downes, J.E. Goodman, "Dictionary of Finance & Investment Terms", Baron's Financial Guides, 2003; and J.G. Siegel, N. Dauber & J.K. Shim, ''The Vest Pocket CPA'', Wiley, 2005.</ref>
==Terminology== The word ''forfaiting'' is derived from the French word ''forfait'', meaning to relinquish the right (in this case, the exporter's right to receive payment from the customer — the importer).<ref>Treasury Today, [http://treasurytoday.com/2008/09/forfaiting Forfaiting] {{Webarchive|url=https://web.archive.org/web/20181230084736/http://treasurytoday.com/2008/09/forfaiting |date=2018-12-30 }}, published September 2008, accessed 7 July 2018</ref> Thus forfaiting is also referred to as "without recourse" financing.<ref>HMRC, [https://www.gov.uk/hmrc-internal-manuals/vat-finance-manual/vatfin3235 VATFIN3235 - Credit, debts and related services: debts and related services: forfaiting], ''VAT Finance Manual'', updated on 5 May 2020, accessed on 28 August 2025</ref>
==Characteristics== The characteristics of a forfaiting transaction are: * Credit is extended to the importer for a period of between 180 days and seven years. * The minimum bill size is normally $250,000, although $500,000 is preferred. * The payment is normally receivable in any major convertible currency. * A letter of credit or a guarantee is made by a bank, usually in the importer's country. * The contract can be for either goods or services. Typical usage relates to the sale of capital goods.<ref>Mezra Finance Ltd., [https://web.archive.org/web/20150714140307/https://www.forfaiting.co.uk/forfaiting.shtml What is Forfaiting?], archived on 14 July 2015, accessed on 28 August 2025</ref>
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.<ref>{{Cite web|title=What Forfaiting Means for Importers and Exporters|url=https://www.investopedia.com/terms/f/forfaiting.asp|access-date=2021-09-11|website=Investopedia|language=en}}</ref><ref>{{Cite web|title=Bills of Receivables, Bills of Exchange & Promissory note {{!}} OracleUG|url=http://www.oracleug.com/comment/2308|access-date=2021-09-11|website=www.oracleug.com}}</ref>
==Pricing== Three elements relate to the pricing of a forfaiting transaction: * Discount rate, the interest element, usually quoted as a margin over LIBOR.<ref>{{Cite book|last=Pathak|first=Bharati V.|url=https://books.google.com/books?id=18iJsAxmK0gC&q=Discount+rate%2C+the+interest+element%2C+usually+quoted+as+a+margin+over+LIBOR.&pg=PA704|title=The Indian Financial System: Markets, Institutions and Services|date=2010|publisher=Pearson Education India|isbn=978-81-317-2817-8|language=en}}</ref> * Days of grace, added to the actual number of days until maturity for the purpose of covering the number of days normally experienced in the transfer of payment, applicable to the country of risk. * Commitment fee, applied from the date the forfaiter is committed to undertake the financing, until the date of discounting.
The benefits to the exporter from forfaiting include eliminating political, transfer, and commercial risks and improving cash flows.<ref>{{Cite web|title=Foreifting and Factoring Benefits for Exporters and Exporter's Banker.|url=http://www.eximguru.com/exim/guides/export-finance/ch_7_forfeiting_factoring.aspx|access-date=2021-09-11|website=www.eximguru.com}}</ref> The benefit to the forfaiter is the extra margin on the loan to the exporter.
==Professional associations== The oldest forfaiting association in the world is VEFI, the Association of Forfaiters in Switzerland ({{langx|de|Vereinigung von forfaitierenden Instituten in der Schweiz}}), which was founded in 1978.<ref>[http://www.forfaitswiss.ch Welcome to the VEFI-Website!] {{Webarchive|url=https://web.archive.org/web/20220808063528/http://www.forfaitswiss.ch/ |date=2022-08-08 }}, accessed 7 July 2018</ref> The International Trade & Forfaiting Association (ITFA) <ref>{{cite web|url=http://www.itfa.org|title=ITFA|first=Logix|last=Digital|publisher=|accessdate=7 March 2017}}</ref> was founded in 1999 as a worldwide trade association for the forfaiting industry with a cash contribution from VEFI.<ref>{{Cite web|title=» About Us|url=https://itfa.org/about-us/|access-date=2021-09-11|language=en-US}}</ref> Its purpose is to develop business relationships and assist other forfaiting-related organizations.<ref>{{Cite web|title=Guidelines on Risk Factors_EN_04-01-2018.pdf|url=https://esas-joint-committee.europa.eu/Publications/Guidelines/Guidelines%20on%20Risk%20Factors_EN_04-01-2018.pdf|access-date=2021-09-11|archive-date=2022-04-23|archive-url=https://web.archive.org/web/20220423183515/https://esas-joint-committee.europa.eu/Publications/Guidelines/Guidelines%20on%20Risk%20Factors_EN_04-01-2018.pdf|url-status=dead}}</ref>
== See also == {{Wiktionary|forfait}} * Banker's acceptance * Letter of credit
==References== {{Reflist}}
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Category:Business terms Category:International finance