Forfaiting means that CEXIM, as the forfaiter, purchases accounts receivable (outstanding claims) of the seller/creditor (our customer) without recourse. The accounts receivable should be generated from trading goods, or services and be accepted/undertaken/avalised by banks to make payment.
It is often the case that the outstanding claims, in the form of drafts, promissory notes or other debt instruments, have been guaranteed to be paid at maturity by the recognized banks, insurance companies or government agencies.
Benefits for Sellers
Financing without Recourse: Forfaiting is a method of non-recourse finance which does not occupy the seller’s credit line, so the seller (our customer) will have no contingent liability once obtaining advances from CEXIM;
Accelerating Cash Flow: By turning accounts receivable into current cash income, the seller solves its liquidity, reduces debts to banks and optimizes financial statements, thus reducing the funds tied up and enhancing financing ability;
Shifting Finance Costs: The seller can comprehend the forfaiter’s purchase price in advance and pass on the finance costs to the price of the trade so as to save finance costs;
Saving Administration Costs: Without workload in asset management and collection of accounts receivable, administration costs can be reduced greatly;
Increasing trade opportunities: Transaction between the seller and buyer can be facilitated under deferred payment, thus the impossibility of carrying out the trade owing to buyer's lack of money can be avoided;
Mitigating risks: The seller can be protected against interest risk, exchange risk, credit risk, and country risk that often arise with usance payments;
Flexible Structure: The term of domestic forfaiting is no longer than one year, while the tem of cross-border forfaiting is normally no longer than three years and the maximum term is five years; it is optional between fixed or floating rates of interest; major currencies are available;
Advance Tax Rebate: Through forfaiting can the customer receive export tax rebate earlier to save financial costs.
When Do You Choose Forfaiting?
The buyer requires usance payment, while the seller does not want to take on the risks of usance payment or lose the trade opportunities;
The seller wishes to reduce the accounts receivable for a better financial statement;
Faced with a lack of working capital, the seller is in a shortage of credit facility or unwilling to occupy its credit facility;
The seller does not accept finance arrangement with recourse;
The seller encounters a new investment opportunity before collection of accounts receivable, and the expected return rate is higher than the total cost of forfaiting;
The exporter wishes to achieve the export tax rebate in advance under cross-border forfaiting.
Choosing an issuing bank or an accepting/undertaking bank with high credit standing is helpful to passing the application and obtaining a favorable rate;
Since forfaiting is medium or long-term finance service, the seller using this method should allow the buyer to make installment payments over a period of 6 months to 5 years so that a series of drafts, promissory notes or other debt instruments can be addressed at regular intervals to satisfy the conditions of forfaiting;
Forfaiting suits not only large transactions of capital goods but also small transactions. However, the smaller the sum, the higher the finance cost is, so the seller should consider about striking a balance between costs and convenience;
The clause of non recourse becomes void to the seller under following situations: 1.A court injunction issued; 2.Invalid drafts or receivables; 3.A fraud or default committed by the seller; 4.A severe defect found in the transaction.