Forfaiting

An exporter sells 10 million euros of machinery to a Turkish buyer, payable in four semiannual promissory notes of 2.5 million, each bearing the aval of an Istanbul bank. It hands the notes to a forfaiter, which pays their discounted value in cash and gives up any recourse against the exporter if the avalising bank fails to pay. The word comes from the French à forfait, the practice took shape in Switzerland on capital goods sales to Eastern Europe, and London turned it into a market. It deals in receivables of six months to five years, sometimes seven, in large ticket sizes, at a fixed rate: the exporter knows its net proceeds on the day of sale. The forfaiter carries the avalising bank's risk and the country's, transfer risk included. It holds it, sells it on in the secondary market, or insures it against nonpayment in the private credit and political risk market. The exporter remains answerable only for the validity of the claim: void notes, a forged aval, and the forfaiter comes back to it. The ICC and the International Forfaiting Association (IFA) published Uniform Rules for Forfaiting, URF 800, in force since January 1, 2013. Against factoring, it all comes down to grain. A factor buys a flow of 30 to 90 day invoices on hundreds of buyers, often with recourse or backed by credit insurance, and runs the receivables ledger. A forfaiter buys one transaction, medium term, on a bank signature, without recourse and without collection services. Compared with a buyer credit backed by a public export credit agency, it is quicker to arrange, but only on the countries and banks the market will take.