Forfaiting under an Export LC

After the Issuing Bank confirms the receipt of documents and the payment on the due date, the Bank may enter into a Forfaiting Agreement with the beneficiary of the LC, whereby the Bank pays out to the beneficiary, without recourse, the amount of purchased receivables under the LC reduced by a discount. The Issuing Bank pays out the LC value to the Bank on the due date thus settling the receivables under the LC.

Benefits and Advantages for the Exporter

  • By a forfaiting under an LC, the exporter converts its receivables to cash thus improving the liquidity. By obtaining the cash without incurring new indebtedness, the exporter controls the amount of liabilities in the Balance Sheet.
  • There is no risk of the buyer related to payment upon delivery (payment is guaranteed by the LC provided that the delivery is made as specified).
  • The ability to negotiate more favourable payment terms for buyers (by granting longer deferred payment terms, the supplier can receive additional orders from the Buyer).
  • In LC forfeiting transactions, the Bank fully takes over the following risks:
    • Country risk (political and transfer) – extraordinary measures by the government or other political risk, such as war or civil unrest, which may prevent the collection of payment. A permanent or temporary inability or refusal by a government and competent state authorities to make payments in the agreed currency.
    • FX risk – risk of receivables impairment due to reduced value of the original currency of the receivables vs. the local currency.
    • Commercial risk – a permanent or temporary inability or  refusal by the Issuing Bank to settle the receivables due.
    • Interest Rate risk - the contractual price, fees and any other costs remain unchanged for the Beneficiary.