## Forfaiting
### Meaning
Forfaiting (from the French forfait, meaning 'to relinquish a right') is a bill-discounting arrangement in international trade. An exporter sells its trade bills (receivables) to a bank or financial institution and relinquishes the right to collect payment from the importer.
### Key Feature: 'Without Recourse'
Forfaiting is 'without recourse' financing — the bank assumes the risk of non-payment. If the importer fails to pay, the bank cannot come back to the exporter. The exporter gets immediate cash and is fully relieved of the credit risk.
### Process
1. Exporter sells goods/services to an overseas importer.
2. Importer issues a letter of credit (or other negotiable instrument) via its bank (importer's bank).
3. Exporter submits the letter of credit to its own bank (exporter's bank).
4. Exporter's bank buys the letter of credit 'without recourse' and pays the exporter immediately.
### Features / Benefits of Forfaiting
| Feature | Benefit |
|---|---|
| Encourages exporters | Payment assurance motivates expansion into new markets. |
| Deferred payment for importers | Overseas buyers can import goods/services on credit. |
| Reduces transaction costs & complexity | Simplifies international trade transactions. |
| Supports business growth | Exporters compete globally while using working capital efficiently. |
| Competitive financing for importers | Importers access forfaiting from global institutions at better interest rates. |
### Exam tip
The single most testable point is 'without recourse' — this is what distinguishes forfaiting from ordinary bill discounting (where the bank can recover from the drawer if the bill is dishonoured).