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Forfeiting is another way of getting finance against the capital goods exported through purchase of bill by some other person/company, called forfeiter, which purchases all such export bills which shall be due on future dates. The important point in this transaction is that these purchase of bills made by the financier /company is without recourse and in case the bill is returned, the exporter shall  be absolved from any liability and the part of the loss or the entire loss shall be to the account of the forfeiter who has purchased such bills.

Further, initially, the exporter approaches the forfeiter who stipulates a period under which the capital goods are to be manufactured and delivered for shipping and prepares all documents including bill of exchange, invoice, bill of lading, bank guarantee etc. meant for presentation to the forfeiter.

The responsibility of the exporter is to manufacture the goods as per order and export these goods to the importer as per agreed terms and conditions which creates a legal /valid payment obligation of the importer. This payment obligation of the importer is guaranteed by the reputed bank of the importer on due date.

However, the forfeiter besides commission, risks (political, commercial, country, currency exchange etc), deducts the interest for the entire period in advance from the total proceeds of the bill and makes the payment of the balance to the exporter. Thus exporter gets the immediate payment from the forfeiter without any present or future risk which is taken care of by the forfeiter.

We can summarise the advantages to the exporter and the forfeiter as under:

Advantages:

a. RISK FREE OPTION

Exporter get risk free option for exports as all the transactions under the forfeiting are without recourse.

b. IMPROVED LIQUIDITY:

Since the exporter gets the money of the exported goods immediately, it gives liquidity to the exporter and there are no bill receivables in the balance sheet, thus it improves liquidity and current ratio as well.

c. CONVERT CREDIT SALES INTO SALES:

Since the payment is received immediately by the exporter from the forfeiter, the credit sales are converted in to cash sales, the process improves the liquidity of the firm or the exporter.

d. CREDIT LIMIT DOES NOT GET BLOCKED

Since the exporter gets money immediately and the bill receivables are not appearing in  the balance sheet, the exporter can avail the credit limits available to him on account of further exports bills if does not want to go for forfeiting arrangement due to any reason.

e. FREE FROM POLITICAL RISKS (COUNTRY RISK)

Since the bills are negotiated without recourse under the forfeiting arrangements, all risks like political risk, currency risk, insurance risk, commercial risk and interest rate risk are to the account of the forfeiter and the exporter is free from all such risks.

BENEFITS TO FORFEITING AGENCY (FORFEITER) 

Forfeiting agency purchases receivables at a discount, get interest in advance  from an exporter on a without recourse basis and thus utilises his cash resources more efficiently and effectively. Since these bills are covered by guarantee of the bank of the importer, insurance cover is already done; there are rare chances for dishonour of the bill. However, if there is a country risk, the forfeiter has to suffer for the same and therefore, if the forfeiter envisages any such risk, either he does not involve himself in transactions relating to such countries or charge a huge discount which is a business risk with certain element of speculation in any of the trade/ business.

Generally, this type of facility is being availed for the export of medium term facility where the repayment is to be received in 3-5 years in instalments. The exporter cannot wait for such a long period and bank also does not want to make finance for such medium terms, the forfeiter comes int he process and takes all responsibility for the medium term and after acceptance of the bill by the importer and guarantee by the bank of the importer, the forfeiter make the finance available to the exporter entirely at his own risk. The exporter is relieved from any risk in export of such medium term repayment obligations.

DIFFERENCE BETWEEN FACTORING AND FORFEITING

Nature of difference

FACTORING

FORFEITING

Period

Generally the period of credit in factoring is between 90 days to 180 days

Generally the period of credit is between few months to long 10 years

Nature of goods

Factoring deals in current assets like book receivables

Forfeiting deals in capital goods exported, the repayment of which is to be made by the importer within medium term to long term

Risk coverage

Generally, the business risk is covered

Besides business risk, other risks like country risk, currency risk, interest rate risk, political risk are also covered.

Types

Factoring may be with recourse or without recourse.

Forfeiting is without recourse only

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Category Professional Resource, Other Articles by - RAM KUMAR GUPTA 



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