Forfaiting
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The exporter sells the buyer's promise to pay later to a finance provider, gets cash now, and the risk of non-payment passes to the buyer of the promise.
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01 · In plain words
You sell the buyer's promise to pay later, and you get cash now with no claim back on you if the buyer does not pay
In , an exporter sells its right to be paid later. The buyer of that right is a finance provider called a . The forfaiter pays the exporter now, less a charge called the . It covers the time until payment and the risk the forfaiter takes on (US International Trade Administration).
The right to be paid sits in a written promise. This can be a promissory note, where the importer promises in writing to pay. It can be a bill of exchange, where the exporter orders the importer in writing to pay and the importer signs to agree. It can also be a bank's duty to pay under a (Global Supply Chain Finance Forum).
The key words are "without recourse." The forfaiter cannot claim the money back from the exporter if the importer does not pay. So once paid, the exporter is out of the payment part of the deal (US ITA). The forfaiter checks the documents before it pays.
Forfaiting can cover long payment periods. The US ITA names credit of 180 days to seven years or more, for capital goods, commodities and large projects. GSCFF says the , the length of the finance, can run from one month to several years. Both sources describe it as finance for credit, paid after the goods ship.
Who is involved
- The exporter sells the goods, then sells the payment promise to the forfaiter.
- The importer buys the goods and owes the money on the promise.
- The importer's bank, where the forfaiter asks for it, guarantees the promise. A bank guarantee written on a note or bill is called an .
- The forfaiter agrees the deal, sets the discount rate and pays the exporter.
- Other finance providers and investors can buy the promise from the forfaiter in the , again without recourse.
02 · How it works
Nine steps take the deal from the first call to the forfaiter to the last payment
Figure 1 · Interactive
Forfaiting, step by step
Read down the steps. The exporter is paid at step 6. The importer pays at step 9.
Source: US International Trade Administration, Trade Finance Guide, July 2022, forfaiting chapter (How Forfaiting Works); Global Supply Chain Finance Forum on the instruments and the secondary market.
03 · What it means for you
The exporter gets cash and hands on the payment risk, and the importer pays over time on a firm written promise
Figure 2 · Interactive
What forfaiting means for each side
Choose your side of the trade.
04 · Worked example
On $1,000,000 of notes, the exporter receives $910,000.00 or $918,824.71, depending on how the discount is worked out
This example uses round, made-up numbers. The importer signs five promissory notes of $200,000 each. One falls due every 180 days, so the last is paid after 900 days. The forfaiter uses a rate of 6.00% a year on a 360-day year. There are two standard ways to work out the discount at the same rate. Method one, : the charge is taken off the face value. Method two, : the exporter gets the amount that would grow to the face value at that rate. Real rates depend on the importer's country, the length of credit, the currency and the repayment plan.
Figure 3 · Illustrative
Cash to the exporter for five notes, $1,000,000 in total
Illustrative inputs. The difference between the two methods is highlighted.
Made-up rates, worked out by our checking script. The 360-day year follows the US money market basis used by the Federal Reserve. A forfaiter's real offer will differ by country, tenor, currency and deal.
05 · When to use it
Forfaiting suits exports on long credit where the importer gives a written promise, often backed by its bank
Good fit when
- You sell capital goods, commodities or large projects on credit of 180 days to seven years or more (US ITA).
- You want 100 percent of the contract value financed and no further exposure to the importer once you sell (US ITA).
- A bank in the importer's country can guarantee the importer's promise (US ITA; GSCFF).
Another tool may suit better when
- There is no written promise to pay that stands apart from the sales contract. Look at factoring, where the exporter sells its invoices.
- You need money before you ship. The forfaiter pays after delivery. Look at pre-export finance.
- The buyer wants time to pay under a bank's promise, and you can wait for the money. Look at a usance letter of credit. For long credit backed by a national export credit agency, look at ECA-backed finance.
06 · Rules and a real case
Forfaiting deals can follow the ICC's URF 800, and the law that governs the note or bill also applies
The ICC , came into effect on January 1, 2013 (ICC). ICC and the International Trade and Forfaiting Association (ITFA) wrote them together (ICC news, 2017). They cover letters of credit, bills of exchange, promissory notes and invoice purchases (ICC, 2013). They cover both the first sale to a forfaiter and later sales between finance providers (ICC Store).
The law of the country that governs the note or bill also applies. Under the UK Bills of Exchange Act 1882, a bill of exchange is "an unconditional order in writing" (section 3). A promissory note is "an unconditional promise in writing" (section 83). The importer who signs a promissory note is its .
A real milestone. On July 14, 2017, the United Nations Commission on International Trade Law (UNCITRAL) endorsed URF 800. ICC called them the first ever global rules for forfaiting (ICC news, August 22, 2017). The ICC Banking Commission had approved the rules in November 2012, at its meeting in Mexico City (ICC news, January 30, 2013).
Summary
Forfaiting turns the importer's promise to pay later into cash for the exporter now
The exporter sells a promissory note, bill of exchange or a bank's promise to pay under a letter of credit to a forfaiter, without recourse. The exporter gets cash after delivery and steps out of the payment risk. The importer pays the holder on each due date, often with its bank's guarantee. The cost is the discount, so agree it with the forfaiter before you fix the price.
Related guides: Forfaiting; Receivables finance; The payment terms spectrum. Related cards: Factoring; Letter of credit (usance); Pre-export finance. Every term is in the Trade Finance Glossary.
Sources
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters (2022 edition), forfaiting chapter, July 2022. Supports: definition, the step flow, tenor of 180 days to seven years or more, 100 percent financing, without recourse, cost and risk drivers
- Global Supply Chain Finance Forum, Forfaiting, Standard Definitions for Techniques of Supply Chain Finance, October 31, 2024. Supports: definition, instruments, tenors of one month to several years, advance of 100 percent less charges, secondary market, bank in the buyer's country
- International Chamber of Commerce, Launch event explains new ICC rules for forfaiting, January 30, 2013. Supports: URF in effect January 1, 2013, approval in November 2012, instruments covered
- International Chamber of Commerce, UN endorses ICC Uniform Rules for Forfaiting URF 800, August 22, 2017. Supports: UNCITRAL endorsement on July 14, 2017, joint ICC and ITFA rules
- International Chamber of Commerce, Uniform Rules for Forfaiting (URF 800), ICC Store, 2012. Supports: primary and secondary market coverage
- legislation.gov.uk (UK Parliament), Bills of Exchange Act 1882, section 3, 1882. Supports: definition of a bill of exchange
- legislation.gov.uk (UK Parliament), Bills of Exchange Act 1882, section 83, 1882. Supports: definition of a promissory note
- Board of Governors of the Federal Reserve System, Selected Interest Rates (Daily), H.15, September 29, 2026. Supports: discount basis and 360-day year in the worked example
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