Supplier credit - Forfaiting
Improving competitiveness and maintaining control of risk
Exporters must often offer their customers a deferred payment, whose yield can range from 6 months to several years, depending on the type and size of the supply contract. This is referred to as "export credit" and can be a serious problem for companies to solve: first, they have to be insured against the risk of non-payment, and then obtain the necessary liquidity to address the readiness of the supply.
When the company grants a credit to the customer, receiving a instrument which represent that credit (such as: bills of exchange or promissory notes), we are witnessing a "supplier credit".
The discount "without recourse" of said instruments is commonly referred as "forfaiting". The exporter sells the paper, which represent the debt of the buyer for the received goods, to somebody who, paying with a discount on its face value, keep on itself the risk of debtor’s insolvency and agrees not to claim against the company.
Forfaiting offers a number of advantages to the exporters:
· Transfer the full risk of non-payment
· Payment in cash at the time of shipment
. Financing costs at a fixed rate over a medium to long term
· Possibility to check in advance the standing of the Country and the Debtor
· Achieve a streamlined administrative management of the credit
· Financing costs are not depending on the standing of the exporter
· Exclusion of companies overall financial exposure