Forfaiting is a type of export financing in which a forfaitor (usually a bank or a finance company) purchases freely-negotiable instruments (such as unconditionally-guaranteed letters of credit and ‘to order’ bills of exchange) at a discount from an exporter. This arrangement is Without Recourse to the exporter who is relieved of all risks, but is liable for the payment’s legal validity and any defect resulting from the underlying transaction.
Unlike factoring, forfaiting is available for 100 percent of the payment amount, but is normally for relatively larger sums and for longer maturity dates ranging from periods as short as 180 days and as long as 3-5 years. It is a type of ‘off balance sheet financing.’
Did you know that – “The terms forfaiting originated from an old French word ‘forfait’, which means to surrender one’s right on something, to someone else. Here the right to the receivable is surrendered by the exporter to the forfaitor”!!!