## Forfaiting
Forfaiting (from French forfait = to give up) is a medium-to-long-term financing technique used in international trade. The exporter gives up (forfeits) the right to collect payment from the importer and sells the receivable to a bank or financial institution (the forfaiter).
### Step-by-Step Process
1. Exporter sells goods/services to a foreign importer.
2. Importer issues trade bills or a Letter of Credit (LC) through their bank.
3. Exporter presents these instruments to their own bank.
4. Exporter's bank purchases the receivables without recourse — pays the exporter immediately.
5. Bank collects from the importer on the due date.
### Key Features
| Feature | Detail |
|---|---|
| Recourse | Always without recourse — forfaiter bears all payment risk |
| Security | Always secured by bank guarantee or LC |
| Balance Sheet | Off-balance sheet — not a loan |
| Scope | Used for export transactions only |
| Credit Period | Medium/long-term (6 months to 5 years) |
### Benefits
- Exporters: Reduced risk, simplified transactions, immediate liquidity, entry into new markets.
- Importers: Deferred payment terms (buy now, pay later).
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## Factoring vs Forfaiting — Comparison
| Basis | Factoring | Forfaiting |
|---|---|---|
| Meaning | Sale of short-term receivables to a factor | Sale of medium/long-term export receivables to a forfaiter |
| Time Period | Short-term (up to 90–180 days) | Medium/long-term (6 months to 5 years) |
| Type of Receivable | Trade receivables (domestic or export) | Export receivables backed by promissory notes or bills of exchange |
| Security | Usually unsecured (relies on debtor creditworthiness) | Always secured by bank guarantee or LC |
| Recourse | Can be with or without recourse | Always without recourse |
| Cost | Service charge + interest | Higher discount (longer credit period and higher risk) |
| Used By | Companies needing working capital quickly | Exporters selling goods on long-term credit |
| Main Objective | Improve liquidity & manage collection | Encourage exports by covering political and credit risks |