Forfaiting

1. Purchase contract
2. Request for issue of a documentary letter of credit
3. Letter of credit
4. Delivery of goods or services
5. Presentation of L/C documents
6. Acceptance of L/C documents
7. Forfaiting contract + assignment of receivables
8. Payment of the discounted nominal value of receivables
9. Collection of the nominal value of the receivables as at due date

When combined with a documentary letter of credit, forfaiting improves financial metrics by enabling the collection of receivables. Thanks to the non-recourse purchase and payment from the letter of credit (ideally confirmed by a bank with a higher credit rating), the risk of non-payment is transferred outside the company. The volume of receivables on the balance sheet is reduced, thereby lowering the debt-to-asset ratio and freeing up capacity for further financing.

• Forfaiting can be arranged before the purchase agreement is signed, allowing its costs to be included in the delivery price
• The price for forfaiting is always determined on a case-by-case basis. It depends on the creditworthiness of the bank issuing the documentary letter of credit, the amount of the receivable, and the length of the deferred payment term
• The bank’s fee is deducted from the nominal value of the receivable paid at the time of forfaiting
• The minimum receivable amount is usually CZK 1 million or the equivalent of this amount in another currency
• The minimum deferred maturity of the receivable is usually 45 days

Forfaiting allows your company to safely offer longer payment terms and handle larger financial volumes without affecting your own liquidity. Through forfaiting, the bank immediately converts the receivable into cash, and the risk of non-payment is transferred to the bank (the forfaiter). 

Forfaiting is useful for exporters and improves pricing and payment terms for foreign customers, which accelerates capital turnover. The supplier can finance production and expansion into new areas more flexibly.