Forfait Financing
The International trade market is currently over US $9 trillion dollars a year. Of this trade over US $3 trillion is financed. Forfait financing is a specialized fixed-rate trade financing method that is estimated to exceed USD $40 billion a year. Forfait financing is defined as the selling, at a discount, of medium-term accounts receivable, bills of exchange or promissory notes of a foreign buyer. The debt is normally associated with international trade of goods and services. The debt obligation of the foreign buyer is commonly guaranteed by the buyer’s bank, but may also carry the guarantee of the buyer’s government. Forfait financiers characteristically purchase the debt instruments from exporters without recourse. This means that in the event that the borrower defaults on the debt, the exporter will not be held liable.
The financing system has been widely used primarily by the trading nations of Europe over the last fifty years. The centers for Forfait financing are London; Zurich, and Frankfurt.
Example
In 1999, Northwestern Turkey, the county's most densely populated region and industrial heartland, was struck by two massive earthquakes. The first, on August 17, 1999 measured 7.4 on the Richter scale. Izmit, a city of one million, was nearest the epicenter. The death toll was over 18,000, with some 44,000 people injured, nearly 300,000 homes and more than 40,000 business buildings were either damaged or collapsed. Tens of thousands of the survivors were still living in tents or makeshift housing a year after the tragic earthquakes.
Select Homes, a housing manufacturer in Sacramento got a call. A cement company in Turkey had heard of Select Homes and their housing technology which revolutionized the way structures are built. Select company produced insulating concrete forms that are hollow blocks or panels that crews stack into the shape of the exterior walls of a building. After the forms are fastened with adhesives, reinforced concrete is poured inside. The end result is a foam-concrete sandwich that is water, termite proof and wind, earthquake resistant. Select Homes ultimately sold a license agreement to a Turkish cement company, which became a joint-venture partner.
Together, the joint venture received a contract from the Turkish Housing Ministry for 52 schools. The joint venture purchased a manufacturing facility from Select for $649,000. The Joint venture could not qualify for 3 year financing on its own, but was able to get a Turkish Development Bank guarantee. Select found a London Forfait House willing to finance the transaction through forfait trade financing. The transaction took the following steps:
- The Commercial contract was signed with the Turkish Housing Ministry.
- A Forfaiting agreement was signed with the London Forait House.
- The manufacturing facility was shipped and delivered.
- The promissory note drafts were delivered to the forfait House.
- The drafts were endorsed according to forfaiting agreement along with shipping and trade documents including the invoice.
- Select was paid the total amount of all drafts less discount.
- London Forait House made presentation of drafts for collection at maturity to the Joint Venture.
- The Joint Venture made payment of all drafts as agreed.
|
