Question

Explain how the medium-term capital goods financing (Forfaiting) method is used to finance a trade transaction.

Answer 1

Forfaiting is a form of medium-term trade financing used to finance the sale of capital goods. An important characteristc of the forfaiting transaction is that it involves the sale of the capital goods by the exporter of promissory notes signed by the exporter in favor of the importer. The forfait, usually a (bank/financial institution) buys the notes at a discount from face value. The forfait does not have recourse against the exporter in the event of default by the importer. The promissory notes generally extend out in a series of over a period of three to five years, with a note in the series maturing every six months.

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