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Forfaiting

What is it?

Forfaiting is a method of financing of exports that consists of the deduction without resource, on the part of a financial organization, of the rights of collection of a series of commercial effects that the exporter receives, in order to orchestrate the payment deferred from commercial operations of purchase/sale. The instruments liable to be financed are letters and promissory notes, both with first-rate bank guarantees. The admitted term is usually 6 months and 5 years.

Use of forfaiting Forfaiting is used mainly in export operations, since it insures the inherent risks of this activity. They are generally capital goods.

Advantages The non-payment risk is transferred to the financial organization (including commercial, political, exchange rate, interest rate...)

It improves the financial position of the company, because it allows you to transform what is required in available without affecting liabilities.

Proportional liquidity to the company, since at the moment of transfer of credit the amount of the effect deducted is obtained, deducted in cash.

Elimination of administrative expenses and the problems of management of collections Disadvantages It is necessary to emphasize the necessity that the effect be guaranteed, which will depend on the quality of risk of the importer.

The cost of forfaiting is higher in comparative terms to that of factoring or financing of exports




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