What is Forfaiting Factoring? Advantages and limitations of this form

Absolute Factoring (Forfaiting)


Concept


Forfaiting originated in Europe (actually the term “forfaiting” comes from the French “à forfeit”, meaning “free from recourse”).


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Compared to factoring, forfaiting is less applicable. Therefore, up to now, there is no international law or custom that specifically defines forfaiting. Therefore, forfaiting is often written in books of a practical nature.


Forfaiting is also translated into Vietnamese as absolute factoring to distinguish it from factoring is relative factoring.


Forfaiting is a term used to refer to the acquisition of future liabilities arising from the delivery of goods or services, primarily from the export of goods, on the condition that no recourse be made to the exporter.


Forfaiting is a form of international trade finance that involves exporters selling free of recourse at a discount to factoring medium and long-term receivables derived from contracts. purchase and sale of goods provided that the receivables must have a payment guarantee from a reputable bank.


Features of forfaiting


As a financial mechanism to convert exporters' credit sales to cash transactions:


– Through the extraction of debt collection documents from export activities, the debt is represented by draft, promissory note, L/C with bank guarantee.


– Pay immediately the value of the bill of exchange, without recourse to the exporter after deducting the discount fee.


Credit term is medium or long term (usually from 90 days to 5 years).


– The forfaiting night amount is in the range of 100,000 USD – 200 million USD or maybe more.


Instruments to collect debt in forfaiting are promissory notes (also known as bills of exchange) or bill of exchange.


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When a forfaiter repurchases instruments to obtain a claim from an importer, the forfaiter may hold those documents until maturity and demand payment from the importer, or may also resell those documents before expire.


For forfaiting, there are two types of markets as primary market and secondary market.


Benefits of forfaiting in international trade


For the forfaiter


By providing forfaiting credit, forfaiters are assigned valuable papers that can be traded on the secondary forfaiting market. This is considered a profitable form of financial investment by forfaiters.


Forfaiters are also entitled to the difference between the value stated on the bill of exchange and the amount actually issued to the exporter, and additional commission fees.


For exporters


- Risk reduction


– Reduce liabilities and ensure cash flow


– Fixed discount rate


– Reduce administrative costs


– No restrictions on the type of product, goods or service


– Improve sales and competitiveness for exporters


For importers


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- Simple document procedures, easy to implement


– Importers enjoy a longer credit period.


Limitations of forfaiting


For the forfaiter


– Forfaiter bears all risks of adverse fluctuations in interest rates because the interest rate in a forfaiting contract can be fixed.


– Debit maturity date: the risk that forfaiters may face at this time is that the importer fails to pay on time because the guarantor or the importer's payment agent cannot pay on time or Inability to pay, it is very difficult to collect this money.


For exporters


– Having difficulty in getting a guarantee from a reputable bank or financial institution to guarantee and meet the requirements of the forfaiter.


– There is a risk when the importer unilaterally cancels the contract within the period of the exporter's commitment to the forfaiter or for some reason the contract is no longer valid. At this time, the exporter must be responsible for reimbursement of the costs and losses to the forfaiter.


– A forfaiting transaction usually has a high cost, consisting of two basic types of costs: commitment fee and discount fee.


For importers


– When asking a bank or financial institution to guarantee, the importer must pay a certain fee. It is a guarantee fee usually from 2 to 3% and a guarantee deposit of at least 10% is required during the term of the promissory note.


– Take the risk of not having enough funding to pay the forfaiter on time.


(Follow Textbook of International Trade Finance, Foreign Trade University, Statistical Publishing House)


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