Characteristics of Forfait Forfait financing may be structured creatively and adaptable to the needs and cash flow characteristics

of the borrower.

Forfait financing is most commonly related to international trade transactions. The exporter extends credit to his customer for some period of time commonly from six months to 5 years but may reach 10 years. The exporter must agree to stagger the repayment schedule of the receivables. The buyer agrees to the repayment of the debt. Debt obligation is usually documented by bills of exchange or promissory notes. Bank guarantee normally required to secure the buyer's debt obligation. Documentation is simple, and quick. Exporter receives payment after shipment of goods and submission of required documents. Typically the debt will be evidenced by a series of notes (such as ten notes due sixmonthly over five years). Payments structure is normally semi-annually in arrears. Payment schedules are flexible and can be structured to accommodate the buyers cash flow. The size of forfaiting transactions varies from US $100,000 - to US $50 million.

Advantages To Exporter

Exporter can offer credit to buyer but receive cash payment. Exporter receives cash immediately upon delivery of the goods or services. No country of origin restrictions as required by Sovereign Export Promotion Agencies. Up to 100% of sale can be financed. Forfait financing is 100% non-recourse to the Exporter. Eliminates the two key risks political and commercial credit risks. Protects exporter from foreign exchange fluctuations, interest rate increases. Simple documentation, rapid, flexible deal structuring. Improves competitive advantage by providing vendor financing. Facilitates expansion of markets to riskier countries. Commitments can be received within a few days depending on country of import. No credit administration, collection efforts with related costs. No contingent liability, enhances balance sheet ratios. Eliminates export credit insurance premiums and commercial banking fees. Financing is transacted confidentially, unlike commercial loans.

Disadvantages To Exporter

Forfait financing does not cover pre-delivery risks. An export shipment is effectively open account until a commitment is obtained from the forfaiter and exporter fulfills their obligations. Exporter has the responsibility to ensure that the debt is legal and enforceable.

Exporter must insure that the debt instrument is properly guaranteed. The cost of forfait financing can be higher than commercial bank financing.

Advantages To Importer

Importer gains access to extended term financing with fixed or floating interest rates. Forfait financing has simple documentation and is very flexible. Can receive financing for up to 100% of cost of goods. Provides access to major hard currency financing. Repayment can be tailored to the buyers cash flow profile. Goods from a variety of sources can be financed. There is no acceleration clause in the case of non-payment of one bill, which is traditionally featured in commercial loan agreements.

Disadvantages To Importer

The importer must pa y for both forfait financing and the fee for banks guarantee. Cost for financing and bank guarantee can be more than direct credit loan. The bank aval or guarantee may be counted against and reduce availability of Importers bank credit lines. Importer may need to cover foreign exchange risk over repayment period.

Advantages To Guarantor

Guarantor bank earns a fee for providing its guarantee or aval on debt instrument. Guarantor bank does not have to utilize own funds to finance its client. The forfait guarantee transaction may appear as a contingent liability or off balance sheet item.

Typical Applications and Tenors

Commodities (oil, coal, rice, grain, etc.) financed from 90 days to 18 months. Services (engineering, design, maintenance, etc.) financed from 180 days to 3 years. Technology (software, computers, communications, etc.) financed from 180 days to 5 years. Construction Project (hospitals, airports, factories, etc) financed from 3 years to 7 years. Capital equipment (machine tools, generators, tractors, etc.) financed from 2 to 7 years. Turn Key Plants (power generation, asphalt production, etc.) financed from 3 years to 7 years.

aval
Definition
Mainland-European term for an unconditional third-party(usually the importer's or buyer's bank) guaranty of thepayment of a bill of exchange or promissory note. Also called avalization, avalkredit, bon aval, pour aval.

Aval
Aval definition :

Term meaning inseparable from the financial instrument. This gives a guarantee and is abstracted from the performance of the underlying trade contract: Article 31 of the 1930 Geneva Convention of the Bills Of Exchange states that the aval can be written on the bill itself or on an allonge. US Banks are prohibited from avalizing drafts.

What Does Aval Mean? A guarantee added to a debt obligation by a third party who ensures payment should the issuing person default.

Investopedia explains Aval The debt obligation could be a note, bond, promissory note, or draft. The third party providing the aval is usually a bank. Since avals can be forged, caution should be taken when accepting these notes. Banks usually only provide an aval to issuers with very good credit ratings. The process of avalizing is performed mainly in Europe. In the United States, banks have restrictions as to what instruments may be provided an aval. http://www.investopedia.com/terms/a/aval.asp#ixzz1dnBTw1Sn

Guaranteeing/ Avalising Bank

Guaranteeing/ Avalising Bank definition :

The person, bank, or financial entity who gives the guarantee for the importer.