Product & Benefit

In many countries, particularly in the emerging markets, providing extended payment terms will greatly improve the chances of winning a contract. Obviously, most exporters would much prefer being paid in cash, without exposing themselves to the costs and risks associated with providing financing to their clients. Forfaiting allows the exporter to meet these needs without taking any additional risk.

With World Opportunities Fund support, the exporter can provide deferred payment financing as a part of the sales proposal or quotation, thereby anticipating the buyer’s needs. Furthermore, by focusing the negotiation on the credit terms offered, the exporter may face substantially less pressure to reduce the price. That in turn, may mean better sales margins and higher profitability.

However, the most significant advantage offered by forfaiting is its usefulness as a selling tool, particularly for sales into countries where buyers lack the resources to pay cash against delivery. For buyers in this segment of the market, the ability to defer payments will affect their choice of supplier. By integrating the financing solution into the sales contract, World Opportunities Fund helps exporters clearly define a strategy that can increase the probability of winning a contract, improve cash-flow and eliminate the risk of a payment default, while protecting their profit margin.

The main benefits offered by forfaiting solutions to exporters are the following:

• The Exporter is paid cash, thus ensuring an enhanced cash-flow and a stronger balance sheet.
• Up to 100% of the contract value may be financed without recourse. There are no minimum down payment requirements and there is no risk retention by the Exporter.
• The Exporter is protected from late payments and defaults resulting from political, credit, and transfer events.
• The Exporter is also protected from adverse movements in interest and foreign exchange rates.
• The Exporter eliminates the administration required to collect the amounts due.
• The Exporter may be able to obtain pre-shipment financing from its banks, against a commitment from World Opportunities Fund to discount the receivable without recourse.
• The Exporter may have a significant commercial advantage over competitors who do not use forfaiting and who, therefore, may not be in a position to offer medium or long term supplier credit financing.
• There are virtually no restrictions on the type of product, commodity or service which can be financed and there are no limitations on foreign content.
• The Exporter can use forfaiting in conjunction with numerous Government export credit programmes, and may be able to access local export subsidies where available.
• The Exporter keeps direct contact with the Importer, and guides all the financial and commercial discussions through to the signing of the contract.
• World Opportunities Fund can fix interest rates up to 18 months in advance of a shipment date, protecting the Exporter from increases in interest rates, during the manufacturing and delivery period.
• Repayment terms can be structured to meet the Buyer’s cash-flow needs, including grace periods.

Benefits of forfaiting to importers:

• The Importer can match repayments to projected revenues, allowing for grace periods.
• The Importer can obtain 100% financing, and avoid paying out cash in advance.
• The Importer can pay interest on a fixed rate basis for the life of the credit, which will make budgeting simpler and safer.
• The Importer can access medium to long term financing which may be prohibitively expensive or completely unavailable locally.
• The Importer may be able to take advantage of export subsidy schemes which are often available from the Exporter’s government.

This is the most vital part of the documentary package, as it is the proof that the exporter is owed a specific sum of money on a specified date.

Wherever possible, exporters should secure negotiable instruments, which are unconditional, irrevocable and freely transferable, such as promissory notes or bills of exchange, as evidence of the debt. Also, because these instruments are sold without recourse, the exporter who sells them can effectively remove himself from any further involvement with the financial aspects of the transaction, including the risk as well as the administration and collection.

The instruments should include certain key elements, such as the words “for value received”, place and date of Issue, amount due in both words and figures, the specific maturity date, an effective payment clause, a without deduction clause, and a domicile for payment.

Forfaiting offers Exporters flexibility within a simple structure and increases their ability to win business in competitive international markets. Forfaiting can be applied as a stand alone finance package or it can be used in conjunction with officially supported credits backed by Export Credit Agencies (ECA’s) such as ECGD in the UK, Hermes in Germany, Sace in Italy, Coface in France and Ex-Im Bank in the USA.

Used on its own, forfaiting’s flexibility enables Exporters to offer their clients financing for up to 100% of the contract value, whereas ECA backed finance is mainly restricted to only 85% of the value of the goods being supplied.

Used in conjunction with ECA backed credits, forfaiting can be used to finance the uncovered portion of the transaction, including the down payment or any ineligible foreign content. London Forfaiting has extensive experience working directly with exporters in providing financing solutions. Alternatively, it can work with the bank nominated to arrange the ECA backed credit.