Meaning of Forfaiting Agreement

Forfaiting is a financial technique used in international trade to mitigate risks associated with non-payment of goods or services. It is often used when banks issue letters of credit to importers but also when exporters sell goods on credit terms.

A forfaiting agreement is a legally binding contract between a seller/exporter and a forfaiter, whereby the exporter sells the right to receive payment from the buyer/importer to the forfaiter at a discount. The forfaiter assumes the risk of non-payment and provides immediate cash to the exporter, typically within a few days or weeks, depending on the complexity of the transaction.

The term forfaiting is derived from the French word ‘forfait’, which means to forfeit or renounce. In the context of international trade, forfaiting is the act of renouncing the right to claim payment from the buyer/importer and transferring this right to a forfaiter. The forfaiter, in turn, renounces the right to claim payment from the exporter and assumes the risk of non-payment from the buyer/importer.

Forfaiting is suitable for trade transactions with a long repayment period, typically ranging from six months to five years. The exporter can use the cash received from the forfaiter to finance other exports or invest in their business, and the forfaiter earns a return on their investment from the discount offered by the exporter.

Forfaiting can be done through financial institutions such as banks or specialized forfaiting companies. The forfaiter will require detailed information about the transaction, including the buyer/importer’s creditworthiness, the terms of the sale, and the delivery of the goods or services. The forfaiter will also require documentation such as invoices, bills of lading, and insurance policies to support the transaction.

Overall, forfaiting is a useful financial tool for exporters to mitigate risks associated with non-payment of goods or services. It provides immediate cash flow and relieves the exporter of the burden of monitoring and collecting payments. It also allows for the financing of other exports or investment in business operations.

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