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The terms forfaiting is originated from an old French word ‘forfait’, which means forfeiting or surrender of right. Forfaiting is a mechanism by which the right for export receivables of an exporter (Client) is purchased by a Financial Intermediary (Forfaiter) without recourse to him.
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Numerouno Business Consultants Forfaiting
Forfaiting • The terms forfaiting is originated from an old French word ‘forfait’, which means forfeiting or surrender of right. • Forfaiting is a mechanism by which the right for export receivables of an exporter (Client) is purchased by a Financial Intermediary (Forfaiter) without recourse to him. • Forfaiting is a mechanism of financing export • Available by discounting export receivable • Evidenced by bills of exchange or promissory notes • Without recourse to the seller (viz. exporter) • Operated on a fixed rate basis (discount) • Available up to 100% of the contract value.
Pros and Cons of Forfaiting Pros Cons It is very expensive (banks take high fees due to high risks) Not available for short period Not available in financially week country • 100 per cent financing • Improves cash flow • Reduced administration cost • Increased trade opportunity • Eliminates the risk of non-payment • Risk elimination (Exchange risk, and political risks etc)
Costs Involved in Forfaiting • Commitment Fee:- Payable to Forfaiter by Exporter in consideration of forfaiting services. • Commission:- Ranges from 0.5% to 1.5% per annum. • Discount Fee:- Discount rate based on LIBOR for the period concerned. • Documentation Fee:- where elaborate legal formalities are involved. • Service Charges:- payable to Bank.