Forfaiting is a financing method where an exporter sells its receivables to a financial institution at a discount in exchange for immediate cash, without recourse.
How It Works:
- The exporter sells goods on credit to a foreign buyer.
- The exporter approaches a forfaiting institution.
- The receivables are sold at a discounted value.
- The exporter receives immediate payment.
- The financial institution collects payment from the buyer.
Benefits:
- Eliminates risk of non payment
- Improves cash flow instantly
- No repayment obligation for exporter
- Useful for large export transactions
Example:
An exporter sells goods on a 90 day credit and receives immediate funds by selling the receivable to a forfaiting company.