| Forfaiting
is the form of export trade finance involving the discount of trade
–related debt obligations due to mature at a future date without
recourse to the exporter/ endorser.
Generally exporter’s receivables are guaranteed by the importers
credit instruments such as Letter of Credit, Bills of Exchange,
Promissory Note etc.
These instruments which are on non-recourse basis
and avalised/ guaranteed by the bank, can be discounted
before tenor period, for the improvement
of the financial ratios of the organization.
Forfaiters will then quote a price being a discounted rate to be
applied to the credit instrument, calculated on the basis of the
underlying cost of funds (LIBOR) plus margin, conditions of the
instrument and the agreement between client and the forfeiter.
In return the forfeiter bears the whole responsibility for claiming
the debt from the importer.
Forfaiting is useful in offloading burden on the balance sheet where
tenor period is more than two years. Availability of funds could
be varied from US$ 1,000,000 till US$ 45-50,000,000.
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