How much will it cost?
As far as possible, Forfaiters will ensure that the buyer, not the seller, incurs charges involved in a Forfait transaction. Sometimes this will involve changes to the structure of deals concluded, but Forfaiters stress their flexibility in tailoring deals to suit the exporter's needs. When faced with competition for the contract, exporters may choose to absorb some of the fees or financing cost to make the transaction more attractive to their buyer.
Charges depend on the level of interest rates relevant to the currency of the underlying contract at the time of the Forfaiter's commitment, and on the Forfaiter's assessment of the credit risks related to the importing country and to the avalizing (or guaranteeing) bank.
Briefly, the interest cost is made up of:
- A charge for the money received by the seller, which covers the Forfaiter's interest rate risk. In effect, this covers the Forfaiter's refinancing costs and is invariably based on the cost of funds in the Euromarket. Forfaiters calculate this charge on the LIBOR (LIBOR is the London Interbank Offer Rate) rate applicable to the average life of the transaction. On a fiveyear deal, for example, repayable by ten semiannual installments, the average life of the transaction is 2-3/4 years. The LIBOR rate for this period would be used.
- A charge for covering the political, commercial, and transfer risks attached to the avalor/guarantor. This is referred to as the margin, and it varies from country to country, and guarantor to guarantor.
- Additional costs (which are also included in the Forfaiter's calculations) include a «days of grace» charge; and when necessary, a commitment fee. Days of grace are an additional number of days interest charged by the Forfaiter which reflect the number of day’s delay normally experienced with payments made from the debtor country. These range from none to, say, 10 days on some countries.
How soon does an exporter get his money?
Many houses claim that exporters get 100 per cent finance in about two days after presentation of the proper documents. Practices vary between houses.
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