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Short term finance and investment, Forfaiting is non-recourse meaning no…

- - - - Cash flow issues for supplier that could impact on viability of the business
      - refusal of suppliers to supply in future
      - unwillingness to extend credit terms in the future
      - difficulty in obtaining credit terms with new suppliers
      - reduction in credit rating
      - erosion of supplier goodwill
- - - - When due date falls, customer is required to pay and if they do not, it is said to be dishonored and could face legal action
        
        A supplier may wish to trade the BoE with a bank for immediate cash, at a discounted value
        
        Alternatively, supplier may send BoE onto another supplier at a discounted rate, and so on and so on. When customer settles, whoever holds the bill at the time gets full value of funds
        
        To calculate a discounted price, take the rate of discount (discount yield R), multiply by face value (F), multiply by time to redemption (T) over days in the year (Y)
        
        Price=F x (1-RT/Y)
      - Advantages
        
        provide a convenient method of collecting debts from foreign customers
        
        foreign buyer receives full period of credit and exporter can use the bill to immediately finance itself at a discounted rate
        
        if BoE is dishonored, it may be used by the drawer to support legal action in attempts to recover funds
    - - Buyer and exporter agree payment terms of DC
        
        Buyer then send DC to its issuing bank
        
        Issuing bank then confirms the DC and send to the exporter's bank, asking for confirmation of the credit
        
        exporter's bank checks documents and if satisfied, provides advanced payment to the exporter, whilst forwarding documents to issuing bank
        
        Exporter will then dispatch goods to buyer, and present title for goods to its bank
        
        Exporter's bank will send documents to issuing bank, and if they are satisfied will reimburse exporter's bank for the credit given to the exporter
        
        1 more item...
    - - promissory notes will be in any major world currency, and guaranteed by a highly rates international bank (usually in country of importer)
      - Advantages
        
        Forfaited notes are negotiable
        
        trade receivables are turned into immediate cash
        
        assets can be turned into cash
        
        no liability on SoFP due to non recourse nature
        
        future foreign exchange and interest rate risk is eliminated
        
        overdraft and other credit limits are not affected