forfaiting

  

Definition

Type of export financing (practiced largely in Europe) 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 (commercial, political, exchange rate, and interest rate) 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 only for relatively larger sums (usually not less than $100,000) and for longer maturity dates (usually one to five years) although periods as short as 180 days and as long as ten years may also be considered. Practice of forfaiting began during the cold-war era (mid 1940s to mid 1970s) in response to matching the requirements of West-European exporters to the needs of state-owned East-European firms. It is a type of 'off balance sheet financing.'

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