INTERNATIONAL
FINANCE
FINANCING OF INTERNATIONAL
TRADE
Group Members
Vedanti Dixit (19)
Ekta Gupta (21)
Sumit Gupta (22)
Aparna (23)
Harsh Jain (24)
MAllika Jain (25)
FORFAITING
Under this mode of export finance, the exporter forfeits his rights to the future
receivables and the forfeiter loses recourse to the exporter in the event of nonpayment by the importer. It is a trade finance extended by a forfaiter to an
exporter/seller for an export/sale transaction involving deferred payment terms
over a long period at a firm rate of discount.
Forfaiting is generally extended for export of capital goods, commodities and
services where the importer insists on supplies on credit terms.
The exporter has recourse to forfaiting usually in cases where the credit is
extended for long durations but there is no prohibition for extending the facility
where the credits are maturing in periods less than one year. Credits for
commodities or consumer goods is generally for shorter duration within one year.
Forfaiting services are extended in such cases as well.
There are five parties in a transaction of forfaiting:
1. Exporter
2. Exporters bank
3. Importer
4. Importers bank and
5. Forfaiter
Mechanism:
The exporter and importer negotiate the proposed export sale contract. These
are the preliminary discussions. Based on these discussions the exporter
approaches the forfaiter to ascertain the terms for forfeiting. The forfaiter
collects from exporter all the relevant details of the proposed transaction, viz.,
details about the importer, supply and credit terms, documentation, etc., in order
to ascertain the country risk and credit risk involved in the transaction.
Depending upon the nature and extent of these risks the forfaiter quotes the
discount rate. The exporter has now to take care that the discount rate is
reasonable and would be acceptable to his buyer. He will then quote a contract
price to the overseas buyer by loading the discount rate, commitment fee, etc.,
on the sale price of the goods to be exported. If the deals go through, the
exporter and forfaiter sign a contract. Export takes place against documents
guaranteed by the importers bank. The exporter discounts the bill with the
forfaiter and the forfaiter presents the same to the importer for payment on due
date or even can sell it in secondary market.
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Documentation & Cost:
Forfaiting transaction is usually covered either by a promissory note or bill of
exchange. In either case it has to be guaranteed by a bank or, bill of exchange
may be obtained by the importer bank. The forfeiting cost for a transaction will
be in the form of commitment fee, discount fee and documentation fee. All
costs levied by a forfaiter are to be transferred to the overseas buyer.
DIFFERENCE BETWEEN FACTORING & FORFAITING
Factoring
Suitable for ongoing open account
sales, not backed by LC or accepted
bills or exchange.
Usually provides financing for shortterm credit period of up to 180 days.
Forfaiting
Oriented towards single transactions
backed by LC or bank guarantee.
Separate
provision
Single discount charges is applied
which depend on
guaranteeing bank and
country risk,
credit period involved and
currency of debt.
Only additional charges like
commitment fee, if firm commitment is
required prior to draw down during
delivery period.
charges are applied for
financing
collection
administration
credit protection and
of
information.
Financing is usually for medium to
long-term credit periods from 180 days
up to 7 years though short term credit
of 30180 days is also available for
large transactions.
Service is available for domestic and
export receivables.
Usually available for export receivables
only denominated in any freely
convertible currency.
Financing can be with or without
recourse; the credit protection
collection and administration services
may also be provided without
financing.
It is always without recourse and
essentially a financing product.
Usually no restriction on minimum size
of transactions that can be covered by
factoring
Transactions should be of a minimum
value of USD 250,000.
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Factor can assist with completing
import formalities in the buyers
country and provide ongoing contract
with buyers.
Forfaiting will accept only clean
documentation in conformity with all
regulations in the exporting/importing
countries
BILL DISCOUNTING
Bill Discounting is trading or selling a bill of exchange prior to the maturity
date at a value less than the par value of the bill. The amount of the discount will
depend on the amount of time left before the bill matures, and on the
perceived risk attached to the bill. Basically, Bills of exchange are similar to
checks and promissory notes. The difference between a promissory note and a
bill of exchange is that this product is transferable and can bind one party to pay
a third party that was not involved in its creation. While discounting a bill, the
Bank buys the bill before it is due and credits the value of the bill after a discount
charge to the customer's account. The transaction is practically an advance
against the security of the bill and the discount represents the interest on the
advance from the date of purchase of the bill until it is due for payment.
The Bank normally only discounts trade bills. The bank will keep this bill in
possession till the due date. On maturity (due date) the bank will present the bill
to the acceptor and will receive cash from him. In case, the acceptor does not
make the payment to the bank, then the drawer on any person who has
discounted the bill have to take this liability and will pay cash to the bank.
For example, a drawer has a bill for $10,000. He discounted this bill with his bank
two months before its due date at 15% p.a. rate of discount. Discount will be
calculated as the follow:
1,000 15/100 2/12 = 250
Thus, the drawer will receive cash worth $9,750 and will bear a loss of $250.
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