Global Trade | Export and Import | Discounting | Forfaiting
Forfaiting is a form of Receivables Purchase, consisting of the without recourse purchase of future payment obligations represented by financial instruments or payment obligations (normally in negotiable or transferable form), at a discount or at face value in return for a financing charge.
Without recourse financing or discounting of promissory notes/bills of exchange.
Forfaiting requires the existence of an underlying payment obligation usually embodied in some form of legal instrument distinct from the commercial transaction that gave rise to it. Such commercial transactions could be exports, imports, or domestic trade.
There is a primary and secondary forfaiting market.
In the primary market, transactions are originated and obligations can be purchased from sellers of goods and services or their buyers, often in the latter case involving a bank in the buyer’s country. Pure working capital can also be raised through forfaiting by purchasing a promissory note or an unconditional payment undertaking from the finance provider.
The secondary market is conducted between finance providers such as banks, forfaiting houses, or other investors. Tenors can vary from one month to several years. Transaction sizes are generally at the higher end of the supply chain spectrum and large volumes of low-value instruments are more commonly confined to domestic forfaiting. The advance ratio is normally 100% of the face value of the payment obligation and fewer finance charges. There may be one or more such instruments in any given transaction although the number is usually small.
Forfaiting is undertaken without recourse to the seller of goods and services or, in the secondary market, the seller of the forfaited asset.
- Working capital optimization for buyer and seller.
- Potential finance raised against a strong credit rating(either of buyer or financial institution providing security for the payment obligation) with a lower implied cost of funding for the seller.
- Assists sellers in selling to buyers or countries where they have little local knowledge and open-account sales would not otherwise be possible.
- Potentially improved payment and commercial terms for the seller and buyer.
- Finance and liquidity availability for sellers with limited credit availability from traditional banking sources.
- Supply chain stability.
- Relieves sellers of goods and services of administration and collection costs.
Receivables Discounting is a form of Receivables Purchase, flexibly applied, in which sellers of goods and services sell individual or multiple receivables (represented by outstanding invoices) to a finance provider at a discount.
Receivables Finance, Receivables Purchase, Invoice Discounting, Early Payment(of Receivables).
Receivables Discounting is usually offered by finance providers to larger corporate clients selling to multiple buyers. The buyer coverage will depend on the number of buyers for which the finance provider is willing to take credit risk. The finance provider offers finance based on a security margin applied to the open account receivables being assigned by the seller and as pre-agreed between the seller and the finance provider.
For sellers –
- Potentially allows the seller to provide extended credit terms to its buyer.
- Working capital optimization.
- Growth in business on ‘open account’ terms.
- Finance and liquidity availability with limited credit availability from traditional banking sources.
- Potential for balance sheet management via ‘true sale’ of the receivables under the relevant legal structures.
- Credit risk coverage in non-recourse Receivables Discounting as the finance provider will be responsible for normally 100% of any losses arising from the credit covered receivables if the buyer defaults.
- Reduction of the concentration risk by distributing risk to a finance provider.
- Better utilization of the seller’s financial and operational resources if the sale of the receivable is disclosed and collection is handled by the finance provider.
- Confidentiality of the source of finance from the buyer in the case of an undisclosed contractual relationship between the seller and the finance provider.
- Possible improved balance sheet management as the sale of receivables generates off-balance sheet liquidity without creating additional leverage or use of credit facilities (as would be the case with a traditional loan facility).
For buyers – potentially extended payment terms and improved stability of its supply chain. For finance providers, credit exposure with a lower risk profile due to the supply chain-related nature of the financed transaction.
Financial Instruments Monetization | Discounting
SBLC is usually well monetized or used for factoring and performance for trade finance. This is the credit enhancement as the client now has a bank instrument to borrow against it.
GF’s SBLCs can generally be monetized at up to 100%, on face value 100M SBLC/SLOC allowing the client to receive 100M minus any collateral and asset management fees. These funds are returned to the Attorney’s trust account for disbursal, based on FCA and initial structure.
GF can monetize the SBLC at up to 100%(V/R structure and face value dependable), or the client can provide their monetization(per approval only). The monetizer will need to sign a Letter of Indemnity ensuring the SBLC will be returned in 350 days, unencumbered.
Recourse – the monetization may be fully recourse and need to be paid back to the Bank/Lender/Monetizer. This usually gives the SBLC purchaser a higher loan-to-value (LTV) ratio. GF facilitates the distribution of all Recourse SBLCs into Non-Recourse SBLCs by investing 10% of the monetized value into CL1 | CL2 Commercial Loan and relieving the client of the burden of paying back the SBLCs at the higher costs per year.
Non-Recourse – the monetization may be non-recourse, with no need to pay the monetizer back. The monetizer is responsible for paying off the SBLC. This strategy usually generates a lower LTV and is packaged with risks and requirements on long-term insurance default/bond.
For all self-monetized instruments, or recourse based against instruments GF will require that 10% of the monetization is placed in a GF’s AMCP2.205 income program, which GF will manage on the client’s behalf.
At the expiry of the SBLC, GF will return the 10% pledged, and 60% interest on Self-Monetized SBLCs or GF monetized instruments to discharge underlining recourse/debt.
Additional rules and conditions shall apply to all financial engagements.
Additional information or details – Our Global Team will reply to any related inquiry with complete info submitted (proper contact numbers, company details) within 24 hours, as one of our BDM | Business Development Managers will be assigned locally.
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