trade finance Trade finance is a phrase used to describe different strategies that are employed to make international trade easier. It signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction require ...

, forfaiting is a service providing medium-term financial support for export/import of capital goods. The third party providing the support is termed the forfaiter. The forfaiter provides medium-term finance to, and will commonly also take on certain risks from, the importer; and takes on all risk from the exporter, in return for a margin. Payment may be by

negotiable instrument A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...

, enabling the forfaiter to lay off some risks.''A.I. Trade Finance, Inc. v. Laminaciones de Lesaca, S.A.'', 41 F.3d 830 (2d Cir. 1994). Like factoring, forfaiting involves sale of financial assets from the seller's receivables. Key differences are that forfait supports the buyer (importer) as well as the seller (exporter), and is available only for export/import transactions and in relation to capital goods.J. Downes, J.E. Goodman, "Dictionary of Finance & Investment Terms", Baron's Financial Guides, 2003; and J.G. Siegel, N. Dauber & J.K. Shim, ''The Vest Pocket CPA'', Wiley, 2005. The word ''forfaiting'' is derived from the

French French (french: français(e), link=no) may refer to: * Something of, from, or related to France ** French language, which originated in France, and its various dialects and accents ** French people, a nation and ethnic group identified with Franc ...

word ''forfait'', meaning to relinquish the right (in this case, the exporter's right to receive payment from the customer — the importer).

Characteristics

The characteristics of a forfaiting transaction are: * Credit is extended to the importer for a period of between 180 days and seven years. * The minimum bill size is normally $250,000, although $500,000 is preferred. * The payment is normally receivable in any major convertible currency. * A

letter of credit A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an ex ...

or a guarantee is made by a bank, usually in the importer's country. * The contract can be for either goods or services. At its simplest, the receivables should be evidenced by a promissory note, a bill of exchange, a deferred-payment letter of credit, or a letter of forfaiting.

Pricing

Three elements relate to the pricing of a forfaiting transaction: * Discount rate, the interest element, usually quoted as a margin over

LIBOR The London Inter-Bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in London. Each bank estimates what it would be charged were it to borrow from other banks. The resulting average rate is u ...

. * Days of grace, added to the actual number of days until maturity for the purpose of covering the number of days normally experienced in the transfer of payment, applicable to the country of risk. * Commitment fee, applied from the date the forfaiter is committed to undertake the financing, until the date of discounting. The benefits to the exporter from forfaiting include eliminating political, transfer, and commercial risks and improving cash flows. The benefit to the forfaiter is the extra margin on the loan to the exporter.

Professional associations

The oldest forfaiting association in the world is VEFI, the Association of Forfaiters in

Switzerland ). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...

(german: Vereinigung von forfaitierenden Instituten in der Schweiz), which was founded in 1978. The International Trade & Forfaiting Association (ITFA) was founded in 1999 as a worldwide trade association for the forfaiting industry with a cash contribution from VEFI. Its purpose is to develop business relationships and assist other forfaiting-related organizations.

References

{{Wiktionary, forfait Business terms International finance