Forfaiting is a mechanism of financing exports:
a. By discounting export receivables.
b. Evidenced by bills of exchange or promissory notes.
ADVERTISEMENTS:
c. Without recourse to the seller (such as the exporter).
d. Carrying medium to long-term maturities.
e. On a fixed rate basis (discount).
f. Up to 100% of the contract value.
ADVERTISEMENTS:
In a forfaiting transaction, the exporter surrenders his rights to claim for payment on goods delivered to an importer, in return for immediate cash payment from a forfaiting Agency. As a result, an exporter can convert a credit sale into a cash sale, with no recourse either to him or his banker.
Process details:
1. Exporter initiates negotiations with prospective overseas buyer, finalizes the contract and the importer opens an LC through his Bank in favor of the seller (exporter).
2. Exporter Ships the goods as per the schedule agreed with the buyer.
ADVERTISEMENTS:
3. The exporter draws a series of bills of exchange and sends them along with the shipping documents, to his banker for presentation to importer for acceptance through latter’s bank. Bank returns avalised and accepted bills of exchange to his client (the exporter).
4. Exporter informs the Importers Bank about assignment of proceeds of transaction to the Forfaiting bank.
5. Exporter endorses avalised Bill of Exchange (BOE) with the words “Without recourse” and forwards them to the Forfaiting Agency (FA) through his bank.
6. The FA effects payments of discounted value after verifying the Aval’s signature and other particulars.
7. Exporter’s Bank credits Exporter’s a/c.
8. On maturity of BOE/Promissory notes, the Forfaiting Agency presents the instruments to the Aval (Importer’s Bank) for payment.