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Forfaiting is a method of trade finance whereby a bank purchases, on a `without recourse' basis, unconditional debt obligations arising from the cross-border supply of goods. In a traditional forfeiting transaction, the exporter agrees to surrender the rights to claim for payment of goods delivered to an importer under a contract of sale, in return for a cash payment from the forfeiting bank. In exchange for payment, the forfeiting bank purchases the exporter's debt instruments and assumes the full risk of payment for the transaction. The exporter is thereby freed from any financial risk in the transaction and is liable only for the quality and reliability of the goods and/or services provided.
During the tender process, forfaiters normally advise on the credit periods, security and documentation most suitable to an exporter's bid. During the negotiation process, different financing profiles can be presented that suit both importer and exporter, giving detailed calculations of principal and interest payments, based on the timeframes associated with the commercial transaction. When the contract is close to being finalised, the indicative offer is normally converted into a firm offer, reassuring the exporter that financing is in place. Once a commitment is entered into, rates are held for the agreed period, no matter what political or economic events occur after shipment. If an export credit agency is supporting part of the transaction, forfaiters...