Introduction to Commodities Investing
February 12, 2025
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Forfaiting is an important means of raising short-term finance for companies that indulge in foreign trade. With the increasingly easy availability of information regarding the creditworthiness of counterparties, the importance of contracts such as factoring is dwindling. However, it is still a pivotal financial service as far as foreign trade is concerned.
The term “forfaiting” arises from the French word “forfait” which means to relinquish a right. It is essentially a form of bank financing in order to fund working capital requirements for international trade.
Forfaiting can be compared to bills discounting in many ways. This is because in case of forfaiting arrangement also, the exporter simply discounts a promissory note. In this case, the promissory note is endorsed by the importer and also has the implicit backing of the importer’s bank which has opened a letter of credit on behalf of the importer.
However, most forfaiting agencies do not intend to hold on to the agreement till maturity. Instead, these discounted agreements become freely tradable securities. There is an active market for forfaiting contracts in most countries of the world and banks with excess capital looking to make quick loans find forfaiting to be a worthwhile alternative.
The secondary market does not buy the contract considering it to be the liability of a foreign bank. Instead, they take the word of the forefaiting agency that the dues will be paid on a certain date at face value.
Hence, the time remaining till due date as well as the reputation of the forfaiting agency re of prime importance in the secondary market. An agency with a bad reputation will have a hard time reselling its debt.
The financial service of factoring may seem to be pretty similar as compared to forfaiting. Many people tend to get confused between the two. It is therefore important to differentiate between them. The differences between factoring and forfaiting are as follows:
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