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Main characteristics
- Debt is normally evidenced by bills of exchange, promissory notes or a letter of credit.
- The buyer's obligation is usually supported by a
local bank guarantee.
- Documentation is very simple, requiring evidence of underlying transaction (copies of shipping documents) and certain confirmations from obligor/guaranteeing bank.-
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Transactions can be concluded on a fixed or floating interest rate basis.
- Exporter receives funds upon presentation of necessary documents, shortly after shipment.
Advantages
Eliminating Risk
- removed from political, transfer and commercial risk
- protected from the risk of interest rate increases and exchange rate fluctuations
- no deductible as required in an insurance policy
Enhancing Competitive Advantage
- ability to provide vendor financing, making products more attractive
- ability to do business in riskier countries
Increasing Cash Flow
- forfaiting converts a credit- based transaction into a cash transaction
- balance sheet is not burdened by
accounts receivables, bank loans or contingent liabilities;
Transaction Speed
- commitments can be issued within hours/days depending on country
Transaction Simplicity
- documentation is usually concise and straightforward
- relieves the exporter from administration and collection problems
- no restrictions on origin of export.
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