Forfaiting is a form of financing international trade receivables through the discounting of trade bills and promissory notes without recourse to the exporter. It involves a forfaiter purchasing the receivables from the exporter at a discount, taking on the full risk of non-payment. The process begins with a commercial contract between an exporter and importer, where the importer draws bank-guaranteed promissory notes payable to the exporter. The exporter then enters an agreement to sell the notes to a forfaiter at a discount, receiving immediate payment, and the forfaiter collects payment at maturity from the importer's bank. Forfaiting provides 100% financing to exporters and eliminates risks

1. FORFAITING –
Definition, Characteristics ,
Forfaiting Process
By Asst Prof S Rebello

2. DEFINITION OF FORFAITING
.
All risks become the full responsibility of the purchaser (forfaiter).
Forfaiter pays cash to the seller after discounting the bills
Purchase is through discounting of the documents covering the
entire risk of non payment at the time of collection.
Purchase is through discounting of the documents covering the
entire risk of non payment at the time of collection.
Within this arrangement, a bank/financial institution undertakes the
purchase of trade bills/promissory notes without recourse to the seller.
A form of financing of receivables arising from international trade
is known as forfaiting

3. Forfaiting is
100%
financing
without
recourse to
the exporter
Trade
receivables are
evidenced by
bills of
exchange,
promissory
notes or a letter
of credit
It eliminates
all risks from
the
exporter’s
books
Forfaiting
is suitable
for high
value
exports
Forfaiting is
also
available for
low value
goods
Forfaiting
guards
against the
exchange rate
fluctuations
for a premium
charge
An importer’s
obligation is
normally supported
by a local bank
guarantee or an
aval.
CHARACTERISTICSCHARACTERISTICS

4. Forfaiting Process
ExporterExporter
Aval BankForfaiter
ImporterImporter
Commercial contract
Sell & deliver goods
Accepts the avalled bills
Givesguarantee
Repaysatmaturity
Represents bill for payment
Payment to the forfaiter
Entertheagreement
Sellsavalledbills
Makespayment
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10
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5. Steps
• There should be a commercial contract between the exporter and importer.
• The exporter sells and delivers the goods to the importer on a deferred
payment basis.
• The importer draws a promissory notes in favour of the exporter for payment
including interest charge which is guaranteed by a bank. The guarantee by
the bank is known as Aval.
• The exporter enters into a forfaiting agreement with the forfaiter the exporter
sells the avalled notes to the forfaiter at a discount without recourse.
• Payment to forfaiter to the exporter of the face value of the bill/notes less
discount.
• The forfaiter holds these bills/note till maturity for payment by the importer’s
bank.
• Alternatively he can securitize them

6. Steps
• There should be a commercial contract between the exporter and importer.
• The exporter sells and delivers the goods to the importer on a deferred
payment basis.
• The importer draws a promissory notes in favour of the exporter for payment
including interest charge which is guaranteed by a bank. The guarantee by
the bank is known as Aval.
• The exporter enters into a forfaiting agreement with the forfaiter the exporter
sells the avalled notes to the forfaiter at a discount without recourse.
• Payment to forfaiter to the exporter of the face value of the bill/notes less
discount.
• The forfaiter holds these bills/note till maturity for payment by the importer’s
bank.
• Alternatively he can securitize them