In many markets, buyers are likely to put more emphasis on cash flow rather than cash price. This is particularly true in emerging economies, where the availability of extended payment terms can greatly improve exporters’ chances of winning a contract. By focusing negotiations on credit terms offered, exporters may face substantially less pressure to reduce prices, which in turn may mean better sales margins and higher profitability.
Exporters, who prefer being paid in cash, thereby avoiding exposing themselves to the costs and risks associated with providing financing, regularly opt for forfaiting as a trade finance tool to facilitate this process.
So what exactly is forfaiting? Forfaiting is a highly flexible trade financing method that allows exporters to grant credit terms to importers without tying up more of their cash flow while avoiding the risks of possible late payment or default, as well as the exposure to fluctuating interest and/or currency rates during the credit period.
Although forfaiting has traditionally been defined as the without-recourse discounting of trade-related receivables, it has evolved considerably over the last 20 years, and now encompasses many more instruments, structures and concepts. As a versatile and flexible approach to raising finance for the international trade community, it has significant benefits for both exporters and importers.
Today, forfaiting is a mainstream trade finance product, with numerous applications. Through the creative use of forfaiting a wide range of goods and services are financed and the values range from $100,000 to tens of millions. The simplicity and flexibility of forfaiting are the prime reasons for its success and global popularity.
One of the principal forfaiting options available is up to 100 per cent financing, without recourse to the seller of the receivable. The receivable is usually evidenced by legally enforceable and freely transferable payment obligations e.g. a bill of exchange, promissory note or letter of credit, typically denominated in one of the major currencies, with the dollar and the euro being the most common.
Forfaiting can be applied as a stand-alone finance package or used in conjunction with credit facilities offered through Export Credit Agencies (ECAs) such as Ex-Im Bank in the United States. Often, ECA-backed finance is restricted to 85 per cent of the value of the goods supplied. Forfaiting can be used alongside an ECA arrangement to finance the uncovered portion of the transaction, including the down-payment or any ineligible foreign content.
Forfaiting offers exporters flexibility within a simple structure while increasing their ability to win business in competitive international markets.
www.forfaiting.com
Simon Lay is the managing director of the London Forfaiting Company Ltd, a wholly-owned subsidiary of FIMBank plc.