# Forfaiting Explained: How It Works, Benefits, and Real-World Examples

## What Is Forfaiting?

Forfaiting is a means of financing that enables exporters to receive immediate cash by selling their medium and long-term receivables—the amount an importer owes the exporter—[at a discount](https://www.investopedia.com/terms/a/at-a-discount.asp) through an intermediary. It expedites payment and the exporter eliminates risk by making the sale without recourse. It has no liability regarding the importer's possible default on the receivables.

The forfaiter is the individual or entity that purchases the receivables. The importer then pays the amount of the receivables to the forfaiter. A forfaiter is usually a bank or financial firm specializing in [export](https://www.investopedia.com/terms/e/export.asp) financing. It ensures the process. Forfaiting is most beneficial in large international transactions.

### Key Takeaways

*   Forfaiting provides a way for exporters to receive immediate payment by selling receivables at a discount through intermediaries like banks, minimizing credit and transfer risks.
*   This financing method transforms receivables into tradeable debt instruments, offering additional liquidity options in secondary markets with maturities typically ranging from one to three years.
*   By converting a credit-based sale into a cash transaction, forfaiting improves cash flow for exporters and removes accounts receivable from their balance sheets.
*   While forfaiting reduces risk for the exporter, it can be costly and is generally applicable only for transactions above $100,000, excluding deferred payments.
*   The lack of international credit guarantees and select currency limitations can impact forfaiting’s availability, particularly in developing countries.

## Understanding the Forfaiting Process

A forfaiter's purchase of the receivables expedites payment and [cash flow](https://www.investopedia.com/terms/c/cashflow.asp) for the exporter. The importer's bank typically guarantees the amount.

The purchase eliminates the [credit risk](https://www.investopedia.com/terms/c/creditrisk.asp) in a credit sale to an importer. Forfaiting facilitates the transaction for an importer that cannot afford to pay in full for goods upon delivery. 

The importer's receivables become a debt instrument that can be traded on a secondary market. The receivables are typically in the form of unconditional [bills of exchange](https://www.investopedia.com/terms/b/billofexchange.asp) or [promissory notes](https://www.investopedia.com/terms/p/promissorynote.asp) that are legally enforceable, thus providing security for the forfaiter or a subsequent purchaser of the debt.

These debt instruments have a range of maturities from as short as one month to as long as 10 years. Most maturities range from one to three years after the sale.

> **Fast Fact**
>
> Forfaiting is often used in large international sales of commodities or capital goods costing over $100,000.

## Pros and Cons of Forfaiting

### Advantages

Forfaiting eliminates the risk of non-payment for the exporter. The practice also protects against credit risk, transfer risk, and the risks posed by [foreign exchange rate](https://www.investopedia.com/articles/forex/082515/how-avoid-exchange-rate-risk.asp) or interest rate changes. Forfaiting simplifies transactions by turning credit-based sales into cash transactions. This credit-to-cash process gives immediate cash flow for the seller and eliminates collection costs. Additionally, the exporter can remove the [accounts receivable](https://www.investopedia.com/terms/a/accountsreceivable.asp), a liability, from its [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp).

Forfaiting is flexible. A forfaiter can tailor its offering to suit an exporter's needs and adapt it to a variety of international transactions. Exporters can use forfaiting in place of credit or insurance coverage for a sale. Forfaiting is helpful in situations where a country or a specific bank within the country does not have access to an [export credit agency](https://www.investopedia.com/terms/e/export-credit-agency.asp) (ECA). It allows exporters to do business with buyers in politically risky countries. 

### Disadvantages

Forfaiting reduces risks for exporters but is usually more costly than commercial lender financing, raising export costs. These higher costs are generally pushed onto the importer as part of the standard pricing. Additionally, only transactions over $100,000 with longer terms are eligible for forfaiting, but forfaiting is not available for [deferred payments](https://www.investopedia.com/terms/d/deferredpaymentoption.asp).

Some discrimination exists where developing countries are concerned compared to developed countries. For example, only selected currencies are taken for forfaiting because they have international [liquidity](https://www.investopedia.com/terms/l/liquidity.asp). No international credit agency guarantees forfaiting companies. This lack of guarantee affects long-term forfaiting.

## Real-World Example of Forfaiting

The Black Sea Trade & Development Bank (BSTDB) [lists forfaiting in its list of special products](https://www.bstdb.org/what-we-offer/special-products) along with underwriting, hedging instruments, financial leasing, and discounting. BSTDB was established as a source of financing for development projects by 11 founding countries—Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey, and Ukraine.

The bank explains that "the importer’s obligations are evidenced by accepted bills of exchange or promissory notes which a bank [avals](https://www.investopedia.com/terms/a/aval.asp), or guarantees." The minimum operation size that BSTDB will finance through forfaiting is five million euros, with a repayment period of one to five years. The bank might apply option, commitment, termination, or [discount rate](https://www.investopedia.com/terms/d/discountrate.asp) fees.

## The Bottom Line

The core function of forfaiting is as a financial tool that enables exporters to receive immediate cash by selling receivables at a discount through a third party, thereby reducing risk. The key advantage is that it allows exporters to eliminate credit, transfer, and exchange rate risks, facilitating a seamless cash flow. But there are limitations, including the higher costs associated with forfaiting compared to traditional financing methods and its inapplicability to transactions under $100,000.  

Forfaiting is suitable for large international transactions involving commodities or capital goods. It's flexible and adaptable for forfaiting for various international transactions, making it an attractive option for transactions with countries that present high political risk.  Real-world examples include the Black Sea Trade & Development Bank.

> **Article Sources**
>
> 1.  Black Sea Trade & Development Bank. "[Who We Are](https://www.bstdb.org/who-we-are)."
>     
> 2.  Black Sea Trade & Development Bank. "[Special Products](https://www.bstdb.org/what-we-offer/special-products)."