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Characteristics of Forfait
Forfait financing may be structured creatively and adaptable to the needs and cash flow characteristics of the borrower.
- Forfait financing is most commonly related to international trade transactions.
- The exporter extends credit to his customer for some period of time commonly from six months to 5 years but may reach 10 years.
- The exporter must agree to stagger the repayment schedule of the receivables.
- The buyer agrees to the repayment of the debt.
- Debt obligation is usually documented by bills of exchange or promissory notes.
- Bank guarantee normally required to secure the buyer's debt obligation.
- Documentation is simple, and quick.
- Exporter receives payment after shipment of goods and submission of required documents.
- Typically the debt will be evidenced by a series of notes (such as ten notes due six-monthly over five years).
- Payments structure is normally semi-annually in arrears.
- Payment schedules are flexible and can be structured to accommodate the buyer’s cash flow.
- The size of forfaiting transactions varies from US $100,000 - to US $50 million.
Advantages To Exporter
- Exporter can offer credit to buyer but receive cash payment.
- Exporter receives cash immediately upon delivery of the goods or services.
- No country of origin restrictions as required by Sovereign Export Promotion Agencies.
- Up to 100% of sale can be financed.
- Forfait financing is 100% non-recourse to the Exporter.
- Eliminates the two key risks – political and commercial credit risks.
- Protects exporter from foreign exchange fluctuations, interest rate increases.
- Simple documentation, rapid, flexible deal structuring.
- Improves competitive advantage by providing vendor financing.
- Facilitates expansion of markets to riskier countries.
- Commitments can be received within a few days depending on country of import.
- No credit administration, collection efforts with related costs.
- No contingent liability, enhances balance sheet ratios.
- Eliminates export credit insurance premiums and commercial banking fees.
- Financing is transacted confidentially, unlike commercial loans.
Disadvantages To Exporter
- Forfait financing does not cover pre-delivery risks.
- An export shipment is effectively open account until a commitment is obtained from the forfaiter and exporter fulfills their obligations.
- Exporter has the responsibility to ensure that the debt is legal and enforceable.
- Exporter must insure that the debt instrument is properly guaranteed.
- The cost of forfait financing can be higher than commercial bank financing.
Advantages To Importer
- Importer gains access to extended term financing with fixed or floating interest rates.
- Forfait financing has simple documentation and is very flexible.
- Can receive financing for up to 100% of cost of goods.
- Provides access to major hard currency financing.
- Repayment can be tailored to the buyer’s cash flow profile.
- Goods from a variety of sources can be financed.
- There is no acceleration clause in the case of non-payment of one bill, which is traditionally featured in commercial loan agreements.
Disadvantages To Importer
- The importer must pay for both forfait financing and the fee for bank’s guarantee.
- Cost for financing and bank guarantee can be more than direct credit loan.
- The bank aval or guarantee may be counted against and reduce availability of Importers bank credit lines.
- Importer may need to cover foreign exchange risk over repayment period.
Advantages To Guarantor
- Guarantor bank earns a fee for providing its guarantee or aval on debt instrument.
- Guarantor bank does not have to utilize own funds to finance its client.
- The forfait guarantee transaction may appear as a contingent liability or off balance sheet item.
Typical Applications and Tenors
- Commodities (oil, coal, rice, grain, etc.) financed from 90 days to 18 months.
- Services (engineering, design, maintenance, etc.) financed from 180 days to 3 years.
- Technology (software, computers, communications, etc.) financed from 180 days to 5 years.
- Construction Project (hospitals, airports, factories, etc) financed from 3 years to 7 years.
- Capital equipment (machine tools, generators, tractors, etc.) financed from 2 to 7 years.
- Turn Key Plants (power generation, asphalt production, etc.) financed from 3 years to 7 years.
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