In 2019, “Made in Germany” is still in demand, worldwide. Germany exported goods and services for more than 1.2 Trillion Euros across the globe, which is quite close to the increase rate in export Forfaiting to 68.1 Billion Euros per annum. Import Forfaiting increased similarly by 5.5% to 3.7 Billion Euros per annum.
What is Forfaiting?
Forfaiting is a financial service in which the business entity sells its bill receivables to a third party at a discounted rate. Forfaiting involves the selling of all the accounts receivable to an outside agency.
Forfaiters are financial companies which pay cash against the credit sales of the client and obtain the right to receive future payments on those invoices from the debtors of the client.
The exporters allot all receivables approved to the Forfaiter. The Forfaiter is responsible for all aspects of the Forfaiting operation. The Forfaiter selects counterparty, called the Import Factor, generally in the country where the goods will be shipped.
Various benefits of Forfaiting receivables:
• Professional collections
• Extended capital potential
• Elimination of bad debt
• Advantageous in volume and early payment discounts
• No personal guarantees required
• Increased sales in foreign markets
• Protection against credit losses on foreign customers
• Better cash flow through faster collections
• A boost in working capital
• Lower costs than the average charges for Letter of Credit or LC transactions
Types of Forfaiting
Factor companies across the globe offer various types of Forfaiting services depending upon the requirement of the client. Kinds of Forfaiting offered include with-recourse and without-recourse Forfaiting, and disclosed and undisclosed Forfaiting. A brief description of each of these Forfaiting services is given below.
With-Recourse and Without-Recourse or Non-Recourse Forfaiting
A Forfaiting arrangement can enter with recourse or without recourse to the seller. In the case of with-recourse Forfaiting, the factor has legal recourse to the seller, if the debtor fails to pay on maturity. However, in without-recourse Forfaiting, the Forfaiter does not have recourse to the seller in case of default and bears the credit risk in case of the buyer’s inability to pay.
Disclosed and Undisclosed Forfaiting
Under disclosed Forfaiting, the debtor is informed of the assignment of debts to the factor and is accordingly required to cooperate for future transactions and collections. On the other hand, under undisclosed Forfaiting, the debtor is not informed of the agreement entered into between the seller and the factor.
One of the exceptional advantages of export and import Forfaiting is that it allows exporters to trade on open account terms without risk. Forfaiting helps in the growth and expansion of the business across the globe hassle free.