Magazine article Business Credit

Forfaiting as a Risk Mitigation and Sales Tool

Magazine article Business Credit

Forfaiting as a Risk Mitigation and Sales Tool

Article excerpt

Most exporting companies have long recognized the direct relationship between sales and financing. Unfortunately, many of the same companies do not properly evaluate the risk, balance sheet and cash flow implications of providing "supplier credit" financing to spur their sales.

If an exporter is too aggressive with financing, the result is a balance sheet bloated with trade receivables, creating a burden on cash flow and exposing the exporter to country, credit, and transfer risk associated with collecting on a cross border debt. And, reducing sales is not generally viewed as an acceptable risk management tool.

To bridge this gap, many companies have successfully used FORFAITING as a means to grant credit terms to their foreign buyers, without actually keeping the subsequent receivable on their own balance sheet. In a forfaiting transaction, the exporter sells his trade receivable, usually evidenced by a negotiable instrument, such as a Bill of Exchange, or a Promissory Note, to a financier, for cash, and without recourse. By this definition, almost any company that has discounted a draft or a bill with their bank has essentially concluded a forfaiting transaction. Unfortunately, most companies only think about selling a receivable after it has been created, without accurately evaluating the market appetite for the risk, the liquidation costs of the risk, and the documentary structure required to maximize liquidity for the risk. It is in helping the exporter evaluate and manage these issues that forfaiting can add the most value.

Proper application of the forfaiting technique starts at the beginning of the selling cycle, before a sale is concluded, and in fact, at the beginning of the negotiation process. In these early stages of the commercial negotiations, the forfaiter will help the exporter define a conservative exit strategy for a future receivable long before it actually lands on the balance sheet.

As the exporter begins to evaluate a sales lead, he would contact a forfaiter and request an indication of interest. To make the indication meaningful, the forfaiter will require some very specific information from the exporter. This information will include:

The name and country of the buyer

The name and country of the guarantor, if applicable

How long a financing period the buyer would like to have

How much cash the exporter would require if the sale were concluded on a cash basis

If a cash price been disclosed to the buyer and if so, what it is

If the buyer has a specific rate of interest they are willing to pay

When the contract will be concluded

When delivery will take place and if there will be more than one delivery

The purpose of these specific questions is to determine the price for the liquidation of the receivable, and how much flexibility the exporter and the forfaiter have in crafting a sales and financing proposal that will meet the needs of the prospective buyer. …

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