## Forfaiting
Etymology: From French 'forfait' = to give up a right.
Definition: An exporter gives up the right to collect payment from an importer. A bank or financial institution purchases the export receivables and pays the exporter upfront — always without recourse.
### Step-by-Step Process
1. Exporter sells goods/services to a foreign buyer (importer).
2. Importer issues trade bills or Letter of Credit (LC) via their own bank.
3. Exporter presents these instruments to its own bank (the forfaiter).
4. Exporter's bank purchases the receivables (LC/trade bill) without recourse.
5. Bank pays exporter immediately, then collects from importer on the due date.
### Key Features of Forfaiting
| Feature | Detail |
|---|---|
| Recourse | Always without recourse |
| Balance sheet impact | None — it is a sale, not a loan |
| Repayment obligation | None |
| Time period | Medium to long-term (6 months to 5 years) |
| Security | Always backed by LC or bank guarantee |
| Who benefits | Exporters (guaranteed payment) and importers (deferred payment) |
### Why Use Forfaiting?
- Exporters: Reduced risk, immediate liquidity, simplified transactions — motivates entry into new/risky markets
- Importers: Buy now, pay later (deferred payment terms)
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## Factoring vs Forfaiting — Full Comparison
| Basis | Factoring | Forfaiting |
|---|---|---|
| Meaning | Sale of short-term receivables (domestic/export debtors) | Sale of medium/long-term export receivables |
| 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 LC or bank guarantee |
| Recourse | With or without recourse | Always without recourse |
| Cost | Service charge + interest on advance | Higher discount charges (longer period, higher risk) |
| Used By | Companies needing working capital quickly | Exporters selling goods on long-term credit |
| Main Objective | Improve liquidity, manage debtor collections | Encourage exports by covering political and credit risk |