Forfaiting Concept
Forfaiting
primarily is discounting facility offered by bank to the export for discounting
the promissory notes issued by the importer/buyer. Forfaiting is used as medium
term financing provided by some bank for exports. The process of forfaiting arrangement
has been explained below
1. Some Price is paid Now
Buyer pays some percentage
of total prices now, and remaining amount shall be paid by the importer in future,
typically in three to five years.
2. Promissory Notes are Issued
Buyer
shall issue promissory notes against future balance payment. Usually these promissory
notes are of same amount maturing at different dates. The maturity period vary
from 3 month to 1 Year.
3. Bank Guarantee is Required
Buyer
promissory notes are required to be guaranteed by some banks. Some
international bank offers such services. In some cases bank guarantee may not
be required for reputable importer.
4. Export will Find forfaiter
Forfaiter
is a bank, who is ready to discount the promissory notes of the buyer/import.
These promissory notes are discounted using a fixed rate, and export gets the
future payment now.
5. Risk is bear by Forfaiter
Forfaiter is responsible for future risk
associated with payment i.e. political risk, foreign exchange risk, collection
from availing bank.
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