## Forfaiting

Forfaiting is a form of export financing. The word comes from the French forfait, meaning "to relinquish a right." That is exactly what the exporter does: it sells its trade bills (export receivables) to a bank or financial institution and gives up its right to collect payment from the importer.

### Key Feature: "Without Recourse"

The defining feature is that forfaiting is without recourse. Once the bank buys the receivable:

The bank bears the risk of the importer not paying.
The exporter gets immediate cash and walks away clean — if the importer defaults later, the bank cannot come back to the exporter.

This is what distinguishes forfaiting from an ordinary bill discount.

### How the Process Flows

1. Exporter sells goods/services to an overseas importer.

2. The importer issues a letter of credit (or other negotiable instrument) through its bank (importer's bank).

3. The exporter submits that letter of credit to its own bank (exporter's bank).

4. The exporter's bank buys the letter of credit without recourse and pays the exporter immediately.

### Why Forfaiting Helps

Feature	Benefit
Encourages exporters	Payment assurance motivates them to enter new markets
Deferred payment for importers	Overseas buyers can import on credit
Reduces transaction cost & complexity	Simplifies international trade for exporters
Supports business growth	Exporters compete globally while using working capital efficiently
Competitive financing for importers	Importers access global forfaiting at better rates

### Example — Exim Bank's "Buyer's Credit"

A real-world Indian application is the Buyer's Credit scheme of Exim Bank of India.

Aspect	Explanation
What it is	A forfaiting arrangement giving credit to overseas buyers to import goods from India
Purpose	Lets SMEs export capital goods/services on deferred terms while giving Indian exporters non-recourse finance
Benefit to exporters	Converts a deferred-credit contract into a cash contract — immediate payment, reduced risk
How it works	Exim Bank makes advance payment to the Indian exporter on behalf of the overseas buyer

Worked example

### Example 1

Reading the cash-flow logic: An Indian SME exports machinery worth ₹50 lakh to a buyer in Africa on 3-year deferred payment terms. Without forfaiting, the exporter waits 3 years and carries the default risk. Under Exim Bank's Buyer's Credit, Exim Bank pays the exporter the ₹50 lakh (less discount) now, on the buyer's behalf, without recourse — so the exporter has cash today and is fully insulated if the African buyer later defaults; Exim Bank collects from the buyer over the 3 years.

⚠️ Common exam mistakes

Confusing forfaiting with factoring. Forfaiting is typically for medium/long-term export receivables backed by a negotiable instrument (e.g. L/C) and is always without recourse; factoring is usually short-term domestic receivables and can be with or without recourse.
Thinking the exporter still bears the default risk — the whole point of 'without recourse' is that the bank/forfaiter absorbs the non-payment risk.
Mixing up the direction of Buyer's Credit: the credit is extended to the overseas buyer/importer, but the immediate cash benefit and risk-relief go to the Indian exporter.
Forgetting the literal meaning — 'forfait' = relinquish a right, i.e. the exporter relinquishes the right to collect from the importer.

Reference:

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Forfaiting (incl. Exim Bank's Buyer's Credit)

Worked example

⚠️ Common exam mistakes