Buying a debt from a creditor, which will be expressed in a negotiable document, but its basis will be directly opposite, is forfaiting. Such a debt obligation is purchased at a discount in turnover. The buyer assumes the waiver of the claim to the creditor in case of non-receipt of funds. Forfaiting is the acquisition of commercial bills, through which there is a loan of capital for exporters, and without turnover to the seller. The bank acquires from the seller the buyer's obligation to pay for the goods immediately after it is delivered.
Forfeiting - what is it in simple words
A similar form of loan is used in foreign trade by repurchasing bills of the exporter accepted by the importer. The payment schedule occurs according to a scheme in which the buyer pays the bulk of the money, and the seller pays interest for the early sale of money for the goods. The exporter yields to the requirements of the credit institution and acquires the full value. The importer fulfills the obligations on the existing debt, but at the same time he must steadily make payments.
Unlike the standard type of payments, the risks of a debt obligation are completely transferred to the buyer. Regular accounting assumes equal unsafe conditions, while this type of financing places a greater responsibility on the importer. Forfaiting is a reduction in seller's debts, improvement of the structure, acceleration of working capital, stabilization of the rate, a simplified form of loan and transfer of claims. It is expensive compared to conventional lending.
Essential features of forfaiting
In fact, the obligations, payment schedule, risks are assumed by the buyer (borrower). As a rule, clean documents in the form of standard bills or expenses are taken as a basis. A similar form of lending is made out with negotiable securities, but the borrower should not mortgage his business in whole or in part. This lending is commercial and confidential, but often referred to as transformation into banking forfeiting.
The established terms of the transaction can reach up to 7 years. This method is common in European countries. The parties to such an agreement are the seller, buyer and creditor. One of the parties can initiate the agreement individually: either the exporter or the importer. The forfaiting scheme provides for the redemption of the buyer's debt obligations in the event that the provided package of documents to the bank satisfies the interest of the latter. The data should include the fact of the transfer of goods, present obligations expressed in tangible assets, in addition, assignment of claims and the right to receive proceeds to the creditor, which will be sold by the security.
How forfaiting deals
When concluding agreements with the bank, it is necessary to take into account the possibility of information disclosure, especially for those institutions that are able to implement debt documents in the secondary market. Therefore, before concluding a deal, it is necessary to foresee such an outcome of events and liquidate them in advance. In fact, forfaiting is a confidential agreement, but the situations are different. The mechanism of this lending is applied if there is a fact of the presence of the following two transactions:
- emergency liquidation of financial obligations;
- to sell cash to a borrower who has provided debt to a foreign customer.
Among other things, forfaiting has limitations:
- the seller must agree to the implementation of obligations in parts;
- in case the buyer is not a foreign company or private representative, then the return of the debt should be secured by a guarantee from the lender or the bank.
The main instruments of such lending transactions are bills of exchange. However, the types of forfeiting securities are not limited to them, other types may also serve as important documents, the main thing is that they contain an abstract content of obligations.
Becoming
The origins of forfaiting appeared in Zurich when the Second World War ended. In those days, it was in this city that banks had vast experience in international trade. Therefore, they began to finance the supply of grain to European Western countries and the United States. Supplies and competition doubled, so suppliers demanded a delay of six months instead of the usual three. Also in these years, the production of expensive items increased, the production of which took significantly more time.
High-value goods entered the usual way and were in great demand and demand. Credit developed economic and international exchange, thus, suppliers financed their transactions with new methods and ways, and constantly updating and improving these options. International trade began to remove barriers, as a result, many Asian, Latin American and African countries began to actively participate in the global market. However, entrepreneurs provided loans with certain difficulties, since their implementation was mainly from their own sources. Therefore, suppliers were forced to change options for financing transactions.
Development and conditions of forfaiting
This type of lending was mainly improved in underdeveloped countries, where the economic system is unstable. Forfaiting is a certain risk, therefore, the exporter requires and receives certain bills of exchange from the importer. Payment for these securities is made according to pre-established deadlines. The Bank issues a special guarantee, which will indicate that it is this organization that acts as the responsible person for the importer paying the obligation. Other securities may be guarantees for the performance and sale of debt.
Thus, the borrower must be a verified candidate, otherwise a prerequisite is a guarantee or surety (aval). Among other things, there are certain types of guarantees that are determined by the following criteria:
- subject;
- order of registration;
- source of funding.
As a rule, the first type indicated above is banks, financially stable institutions, enterprises with free assets or funds.
The market for such loans
If forfeiting is improved in the country and is practically the main area of lending, for example, in Germany or Italy, then the conditions may be the most flexible, and not only banks, but also specialized enterprises are involved in such issues. In essence, this transaction is a medium-term operation, which has a fixed rate and terms. And most organizations act as forfeitors only if they need an amount of at least one hundred thousand conventional units. True, today the terms and rates are becoming more flexible and loyal, therefore, such lending can be realized for 10 years, and for six months.
Forfeiting and its role in the economic component
Such debt instruments have gained market distribution, so the terms are negotiated on the basis of specific circumstances, and it all depends on the country of the importer and exporter, guarantees.As a rule, payment is made in equal parts once every six months, but most prefer quarterly sales of the amount. With the development and improvement of this market, enterprises do not form the scheme and terms of transactions, especially for those borrowers who have already collaborated with the forfeiter.
Lenders often create their own structure, offer it to potential customers. In addition, they also advise on the best loan option and point to a specific debt instrument, which is more appropriate to use. Such organizations, among other things, assess the risks and essence of the operation.
Additional terms of agreements
For forfeiter the following information is provided:
- complete customer data;
- dates and time;
- all price components;
- payment currency;
- crediting period;
- debt instruments;
- bids
- guarantees.
As for the last point, that is, Aval, for the forfeiter to accept this document as reliable, the world-wide popularity of the bank that issued this guarantee is necessary. In fact, aval and guarantee are one and the same thing, however, there are countries that do not perceive the former as legal paper or a financial instrument.
Agreements with other organizations
Often, exporters cooperate with brokers, because the latter provide reasonable and competitive prices that directly depend on the timing and effectiveness of transactions. Such organizations receive a percentage of the amount of the agreement.
That is, for the exporter this option is advantageous given that payment is made once, which usually happens when the supplier or seller added this amount to the price of the sold item. Based on this, it can be assumed that such transactions have their own characteristics.
Existing criteria for this funding
The advantages and disadvantages of forfaiting are approximately similar to a standard loan. Positive parties to the agreement:
- all risks on the borrower and on the guarantor, the seller disclaims all obligations;
- debt parts can be issued in separate bills;
- obligations are divided in equal parts for a certain period of time;
- flexibility in payments;
- such lending can cover 100% of the cost of goods or services;
- reduced rates;
- varying terms;
- loyalty in the mechanism and scheme;
- cooperation with other organizations, including state ones, and financing can be realized under their guarantees.
The negative sides of forfaiting are as follows:
- the borrower bears full responsibility for the fulfillment of obligations, as well as for the accuracy of the documentation and information;
- financed organizations receive a larger percentage than with standard lending, while they have the opportunity to sell securities on the secondary market;
- difficulties with warranty or aval;
- high interest rates when compared with other types of financing;
- the operation is carried out for several months, given the fact that it is necessary to collect a lot of documents and information.
Forfaiting is quite in demand and popular in world practice, especially for developed countries with a stable economic system. This type of financing should work in any country, but for this it is necessary that in various cities it should be officially fixed in the codes and be a legitimate lending scheme.
