Forfaiting helps accommodate transactions in difficult trading areas

FORFAITING IS an integral part of trade finance and though utilised worldwide is more prevalent in emerging markets. The Standard Bank group is very active in the field and has become a significant player through its subsidiary, Standard Bank London (SBL).
Forfaiting in essence is the non-recourse discounting of bills of exchange or promissory notes or other debt instruments flowing from trade related receivables, under credits made available by suppliers to their creditors, says Owen Tidbury, director, Standard Corporate and Merchant Bank's international division.
As such it is almost as old an activity as the provision of finance itself.
The size of the forfaiting market can only be estimated. The market, however, has grown in recent years, but still forms only a small portion of the total medium term finance provided worldwide.
Forfaiting, he says, is a specialist field, and the bank's teams bring an innovative approach to trade finance, particularly in packaging and structuring of tailor-made facilities to accommodate transactions in difficult trading areas.
Benefits to the buyer include 100% credit possible for goods purchases; there is a fixed or floating interest rate with low interest rate possible; the origin of the goods is unimportant and there is a cashflow benefit. He can also eradicate currency risk and the hidden cost of credit can be tax beneficial.
The seller benefits in that he can use credit as a selling tool, and can offer credit without taking the risk. In addition he has fixed or floating interest, with cashflow benefit and cheap credit available. He can eradicate currency risk as well as the risk of non-payment, while hiding the cost of credit.
Disadvantages, on the other hand, are that both buyer and seller can retain currency risk, and while the buyer faces the hidden cost of credit the seller may suffer in this respect. Both parties face exposure to banking sector delays.