Forfaiting is a great option for exporters who need to receive payment upfront while expanding their customer base. By selling their receivables, exporters receive immediate payment, allowing them to cover their expenses, use the cash to buy raw materials, and purchase or expand inventory. Additionally, the intermediary or forfaiter takes over the uncertainty associated with receivables, shielding the exporter against default risks.

The primary transaction in a forfaiting arrangement is the discounting of a receivable. The exporter sells their receivables at a slight discount to secure a guaranteed payment. This involves the buyer and the exporter entering an agreement to transfer the money owed to the exporter for a specific invoice(s), at a predetermined discount rate. The forfaiter is the third party intermediary that implements and approves the transaction, pays the exporter, and then collects from the buyer on the due date. In exchange, the forfaiter receives a commission on the total amount of the transaction.

In most cases, the receivable is converted into a debt instrument before it's sold to the forfaiter. The debt instrument serves as the basis for the transfer of the funds, and is accepted by the forfaiter as security for the transaction. The debt instruments typically used in forfaiting are unconditional bills of exchange and promissory notes. These documents assign a date and specific amount due, including a discount rate. They also provide legal protection should the buyer default.

Forfaiting is becoming increasingly popular as it provides exporters with immediate cash, protects them from the risks associated with receivables, and opens the door for additional business opportunities. The growth of international trade is making more such instruments attractive to exporters and forfaiting intermediaries, as exporters are not just looking for short-term financial solutions, but also for longer-term instruments to secure their business. Forfaiting has become an essential part of international trade, and is proving to be an invaluable tool for exporters.