The international trade finance sector is home to opportunities that can enable global expansion for businesses. As with every industry, these growth opportunities come with a certain set of challenges. When trading globally, businesses often face complexities related to payment terms, credit risk, and cash flow management.
This is where forfaiting plays a key role. It is a financial tool that offers a range of benefits to businesses engaged in international trade. From better credit risk mitigation to competitive advantages and access to global capital markets, forfaiting can play a pivotal role in supporting export growth and improving financial stability.
The types of forfaiting include discount forfaiting, without recourse forfaiting, with recourse forfaiting, fixed-rate forfaiting, and floating-rate forfaiting. In this blog, we will explore the advantages of forfaiting, along with the forfaiting process.
10 Benefits Of Forfaiting In International Trade
1. Optimised Cash Flow:
One of the primary benefits of forfaiting is its ability to improve cash flow for exporters. In a typical international trade transaction, exporters may offer credit terms to buyers, which means they often have to wait for extended periods to receive payment. Forfaiting allows exporters to convert their accounts receivable into immediate cash by selling their trade receivables to a forfaiter.
2. Credit Risk Mitigation:
Credit risk is a significant concern in international trade, especially when dealing with buyers from unfamiliar markets or those with a less-than-stellar credit history. An important feature of forfaiting is that it enables exporters to transfer the credit risk associated with trade receivables to a forfaiter. The forfaiter assumes the risk of non-payment, allowing the exporter to reduce its exposure to potential financial losses.
3. Cash Flow Predictability:
Forfaiting transactions are typically structured with fixed cash flows, as the forfaiter agrees to purchase the trade receivables at a discount. This predictability can be invaluable for businesses in planning their finances, managing costs, and projecting future cash flows with greater accuracy. This can eventually contribute to the overall financial stability of the business.
4. Supports Export Expansion:
Forfaiting can act as a catalyst for export growth. By mitigating credit risk and improving cash flow, businesses can confidently explore new markets and expand their export activities. Access to consistent financing through forfaiting can enable companies to take on larger contracts and extend competitive credit terms to buyers.
5. Competitive Advantage:
In many cases, offering attractive payment terms to buyers can be a competitive advantage in the international market. Forfaiting allows exporters to provide flexible credit options to buyers without disrupting their cash flow. This can help secure contracts, build customer loyalty, and enhance a business’s reputation as a reliable trading partner.
6. Off-Balance Sheet Financing:
Forfaiting transactions are often structured as off-balance sheet financing. This means that the transfer of trade receivables to a forfaiter does not appear as debt on the exporter’s balance sheet. As a result, forfaiting can help maintain a healthy debt-to-equity ratio, making it easier for businesses to secure additional financing for other strategic initiatives.
7. No Recourse Financing:
In non-recourse forfaiting, the forfaiter assumes all credit risk without recourse to the exporter. This type of forfaiting arrangement provides a higher level of risk protection for the exporter. Even in cases of buyer default, the exporter is not required to repurchase the receivables or cover the losses, further shielding the exporter from financial liabilities.
8. Access To Global Markets:
Forfaiting transactions are often facilitated by financial institutions with access to global capital markets. This access allows businesses to tap into diverse sources of funding and secure competitive pricing for their forfeited receivables. It also provides access to a network of international financiers who specialize in trade finance.
9. Easy Documentation:
Compared to other forms of trade finance, forfaiting transactions are known for their simplicity and efficiency. The documentation requirements are typically straightforward, and the administration process is streamlined. This ease of use can save businesses time and resources when compared to more complex financing options.
10. Increased Liquidity:
Forfaiting can be particularly useful in challenging economic environments or during periods of economic uncertainty. When traditional financing sources become less reliable, forfaiting can offer a lifeline by converting illiquid trade receivables into immediate cash, helping businesses weather financial storms.
The Forfaiting Process
The process begins with the exporter entering into a trade agreement with an importer. This agreement often includes credit terms that specify deferred payment for the imported goods or services. Goods or services are shipped to the importer, and the exporter generates export receivables. These receivables represent the amount owed by the importer to the exporter.
The exporter then chooses a forfaiter, which is a financial institution specialized in forfaiting transactions. The key role of a forfaiter is to manage the credit risk and collect the payments. The forfaiter presents an offer to the exporter, specifying the contract terms. If the exporter accepts the offer, a forfaiting agreement is signed between the two parties.
The forfaiter provides financing based on the export receivables, and the exporter receives immediate cash flow. The forfaiter assumes all credit risk associated with the receivables. The importer is now obligated to make payments directly to the forfaiter at the specified dates. The forfaiter is responsible for collecting payments from the importer and monitoring the performance of the receivables until they are fully paid.
Excellent Export Factoring Solutions – Tradewind Finance
Tradewind Finance provides international trade finance to the world’s small- and mid-market. Founded in the year 2000, with more than 20 offices worldwide, we transact across all continents. Because of our deep understanding of the textile and apparel industry, we can provide each client with a tailor-made solution based on location, products, and payment terms.
We provide export financing for sales made on open accounts, letters of credit, and documentary collections payment terms. Our expert solutions help accelerate clients’ cash flow, allowing them to increase their turnover, and take on larger purchase orders. Using purchase order funding, inventory lending, letters of credit, and structured guarantees, our solutions help align the needs of both buyers and sellers and minimize risk across the supply chain.