Question

There are a number of methods used in financing international trade. Explain how the medium-term capital goods financing (Forfaiting) method is used to finance a trade transaction.

Answer 1

Forfaiting is a method of medium-term capital goods financing.

It is an arrangement wherein the exporter of capital goods received cash immediately by selling their medium-term receivables to a financial intermediary. The risk of non-completion of sale is removed by making the sale without recourse, i.e. the buyer (importer) cannot cancel or reverse the sale. The seller (exporter) can receive cash immediately instead of waiting for the credit period to be completed, thus improving their liquidity situation. The importer still gets the benefit of the credit period. The financial intermediary earns a profit through the discount charges. Thus it is a tripartite arrangement which benefits all three parties, namely the importer, exporter and the financial intermediary.