What is forfaiting?

Forfaiting is purchase of export receivables by a bank without any recourse. Any right of recourse refers to the waiver of any recourse against the receivables seller (exporter).

The exporter is liable for fulfilment of the underlying contract, for the actual existence of the receivables and for the authenticity of the receivables. The receivables can be documented as bills of exchange, letters of credit with deferred payment or pure accounts receivable.

Accordingly, forfaiting is a financing instrument in which the exporter converts a transaction on deferred payment terms to a cash transaction by discounting its receivables. The discount rate is based on the amount of risk assessed for the receivables.