Forfaiting is a term that refers to redemptions (onerous assignment) of outstanding receivables that are secured by a bank guarantee, avalised bank bill or documentary letter of credit with deferred payment. Specialized forfaiting companies perform the buyout of receivables without the possibility of recourse to the supplier if the customer does not pay. Forfaiting is one of the short, medium and long-term forms of financing.
There is a secondary market for forfaiting operations (e.g. in London), in which a forfaiter can resell them.
The advantage of forfaiting is the opportunity to receive cash payment shortly after delivery, to transfer monetary, exchange and other risks in forfaiter, and the ability to offer customers deferred payment.
The downside is that forfeiting is more expensive than a traditional bank loan, but for indebted firms it may be more accessible.
Use of forfaiting in practice: Forfaiting is used by contractors who have an agreed payment term with the customer with deferred payment. This is used mainly by companies supplying foreign suppliers. Forfaiting transactions are negotiated individually (i.e. each transaction).
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