Forfaiting

Forfaiting, also known as bill purchasing, is a non-recourse trade financing method. In medium- to long-term trade involving large equipment or bulk commodities, the exporter sells, without recourse, the receivables under usance drafts, promissory notes, or letters of credit accepted by the importer or guaranteed by a third party to a forfaiter (a bank or specialized institution), thereby obtaining cash in advance and avoiding credit risk, exchange rate risk, and political risk. It is mostly used in exports of capital goods and deferred payment transactions (usually over 180 days). Points to note: forfaiters usually require a guarantee from the importer's bank or a sovereign guarantee, and the costs are relatively high (including discount interest and fees). Once sold, the exporter no longer bears the importer's default risk, but must ensure the instruments are clean and valid. Difference from factoring: factoring is mostly used in short-term (within 180 days) consumer goods trade and usually has recourse or partial recourse; forfaiting targets medium- to long-term transactions, is non-recourse, and involves larger amounts. Difference from negotiation under a letter of credit: the negotiating bank retains recourse against the beneficiary if the issuing bank refuses payment, whereas forfaiting is non-recourse.