Forfaiting Agreement Example: Understanding the Basics
If you are involved in international trade, then you may have come across the term `forfaiting agreement` at some point. This is a financial tool that is used by exporters to overcome the risks associated with cross-border trade. In simple terms, forfaiting is a method of financing where the exporter sells their receivables to a third-party (forfaiter) at a discount in exchange for immediate payment. This article will guide you through an example of a forfaiting agreement and help you understand its key components.
Let`s start by understanding the parties involved in a forfaiting agreement. The exporter is the seller of the goods, the importer is the buyer, and the forfaiter is the third-party who finances the transaction. In a typical forfaiting agreement, the exporter provides the forfaiter with a set of documents that prove the shipment of the goods, such as bills of lading, invoices, and insurance certificates. The forfaiter then provides the exporter with payment, usually in the form of cash, within a specified period. The forfaiter then assumes the risk of non-payment by the importer and provides a guarantee of payment to the exporter.
Now, let`s look at an example of a forfaiting agreement to further illustrate how it works:
ABC Company in the USA exports machinery to XYZ Company in Brazil. The contract value is $100,000, with payment due in 90 days. However, ABC Company needs immediate payment to finance its ongoing operations. Instead of waiting for 90 days for payment, ABC Company decides to enter into a forfaiting agreement with a forfaiter.
ABC Company provides the forfaiter with all the necessary documents, such as bills of lading, invoices, and insurance certificates. The forfaiter then confirms the authenticity of the documents and agrees to provide ABC Company with immediate payment. The forfaiter then assumes the risk of non-payment by XYZ Company and guarantees payment to ABC Company.
In this scenario, the forfaiter may purchase the receivables at a discount. It could be, for instance, 10% of the value of the receivables, which in this case would be $10,000. ABC Company receives immediate payment of $90,000 and can use it to finance its operations, while the forfaiter assumes the risk of non-payment.
Conclusion
Forfaiting agreements are useful financial tools for exporters who seek to manage risk and improve cash flow. By selling their receivables at a discount, exporters can receive immediate payment and mitigate the risk of non-payment by the importer. In our example, ABC Company was able to receive immediate payment from a forfaiter and continue its operations. If you are a trader involved in international trade, it is crucial to understand the fundamentals of forfaiting agreements and their benefits.