Forfaiting is a form of trade finance in which an exporter sells its medium- to long-term receivables, typically represented by promissory notes or bills of exchange, to a financial intermediary known as a forfaiter. In exchange, the exporter receives immediate cash at a discount, transferring all credit risk to the forfaiter on a non-recourse basis.
The term comes from the French word “forfait,” meaning to surrender a right. In practice, the exporter surrenders the right to collect future payments from the foreign buyer, along with the associated credit and country risk. This makes forfaiting particularly attractive when exporters are dealing with buyers in emerging markets where payment risk is elevated.
Unlike short-term receivables financing, forfaiting typically applies to transactions with payment terms ranging from 180 days to seven years. It is most commonly used in the export of capital goods, infrastructure projects, and commodities where transaction values are substantial, often exceeding $100,000 per deal.
How Forfaiting Works
Forfaiting follows a structured process that involves the exporter, the importer, the forfaiter, and often a guaranteeing bank in the buyer’s country.
Step 1: Commercial Agreement
The exporter and importer agree on the terms of the underlying trade transaction, including payment deferral and the use of negotiable instruments such as promissory notes or bills of exchange.
Step 2: Guarantee or Aval
The importer arranges for a bank guarantee or aval (a guarantee co-signed on the promissory note) from a creditworthy bank in the buyer’s country. This gives the forfaiter assurance that payment will be made even if the importer defaults.
Step 3: Discount Arrangement
Before shipment, the exporter approaches a forfaiter and agrees on the discount rate. The forfaiter evaluates the creditworthiness of the guaranteeing bank, the country risk, and the tenor of the receivable.
Step 4: Transfer of Receivables
Once goods are shipped and the negotiable instruments are issued, the exporter endorses them “without recourse” to the forfaiter. The forfaiter pays the exporter the face value minus the agreed discount.
The forfaiter may hold the receivables to maturity or sell them in the secondary market to other investors seeking trade finance paper.
Typical Transaction Profile
Forfaiting is not universally applicable. It is best suited to specific transaction characteristics.
Transactions typically involve capital goods, heavy machinery, aircraft, infrastructure components, or commodities with a clear underlying trade flow. Contract values usually exceed $100,000, and many forfaiters prefer minimums of $500,000 or higher. Payment terms typically run between 180 days and seven years, placing forfaiting squarely in the medium-term financing category.
The buyer is typically located in an emerging market or developing economy where commercial credit terms would otherwise be difficult to arrange. The exporter is usually based in a developed economy and is looking to compete globally without assuming the credit risk of a long-term receivable.
Forfaiting vs. Export Factoring
While both forfaiting and export factoring involve the sale of receivables, the two instruments serve different purposes and operate under different structures.
Export factoring is designed for short-term receivables, typically under 90 days, and often involves an ongoing relationship where a factor purchases a portfolio of invoices on a revolving basis. Forfaiting focuses on individual, discrete transactions with longer payment terms and larger ticket sizes.
Export factoring typically involves open account transactions without bank guarantees. Forfaiting requires a bank guarantee or aval as a condition of the transaction.
From a cost perspective, forfaiting can be more expensive due to country risk premiums, but the non-recourse nature means the exporter has no further obligation once the receivables are sold.
Forfaiting vs. Letter of Credit
A letter of credit (LC) is an instrument issued by a bank guaranteeing payment to the exporter upon presentation of compliant documents. Forfaiting and LCs often work together: an exporter may receive payment under an LC and then sell that LC receivable to a forfaiter for immediate cash.
The key difference is timing. An LC guarantees payment at a future date; forfaiting converts that future payment into immediate liquidity. Together they provide both credit security and cash flow acceleration.
Advantages of Forfaiting
Forfaiting offers a range of benefits to exporters operating in complex international markets.
Immediate cash conversion allows exporters to receive payment at the time of shipment rather than waiting months or years. The non-recourse structure eliminates credit risk from the exporter’s balance sheet entirely. Country and political risk are transferred to the forfaiter, allowing exporters to pursue contracts in markets they might otherwise avoid. Because receivables are sold, the transaction may reduce accounts receivable on the exporter’s balance sheet, improving financial ratios.
Forfaiting also enables competitive offering of deferred payment terms to buyers, which can be a significant commercial advantage in capital goods markets where buyers expect extended credit.
Limitations of Forfaiting
Forfaiting is not without drawbacks.
Cost can be significant, as discount rates reflect country risk, tenor, and the creditworthiness of the guaranteeing bank. Smaller transactions may not justify the fixed costs associated with structuring a forfaiting deal. The requirement for a bank guarantee or aval adds complexity and may not be achievable in all markets.
Forfaiting is also a specialized market with fewer providers than traditional trade finance, which can limit competitive pricing for some exporters.
Forfaiting vs. Supply Chain Finance
Supply chain finance (SCF) operates from the buyer’s perspective, allowing buyers to optimize payment terms while giving suppliers access to early payment at rates based on the buyer’s credit profile. Forfaiting operates from the exporter’s perspective and applies to medium- to long-term receivables in cross-border capital goods transactions.
SCF is most effective in domestic or regional supply chain relationships with high invoice volumes and standardized payment terms. Forfaiting addresses one-off, large-value international transactions with long tenors and significant country risk.
For companies seeking to extend their own payment terms while supporting supplier cash flow, SCF solutions are typically more practical and cost-effective than forfaiting.
Frequently Asked Questions
What types of receivables can be forfaited?
Promissory notes, bills of exchange, and deferred payment letters of credit are the most common instruments used in forfaiting transactions.
Is forfaiting the same as factoring?
No. Factoring involves short-term domestic or international receivables on a portfolio basis. Forfaiting involves individual medium- to long-term export transactions, typically with a bank guarantee.
What currencies are used in forfaiting?
Forfaiting transactions are typically denominated in major currencies such as USD, EUR, or GBP to ensure liquidity in the secondary market.
Can small exporters use forfaiting?
Forfaiting is generally suited to larger transactions. Small exporters with low contract values may find the fixed costs prohibitive.
IMPORTANT NOTE: Forfaiting is a receivables-side product available to suppliers and is not offered by Zenith Group Advisors. Zenith works exclusively with buyers through an insurance-backed, unsecured accounts payable financing program.
