Business Wormhoutastronomie

It is widely acclaimed that, Credit Management of receivables in international trade involves critical decisions in

Formulation of a credit policy  Credit evaluation procedure for the overseas customers  and credit granting decision  Keep an eye on receivables.

    The credit policy of a firm determines whether to extend credit or not if so, to what period and what will be the discount and to what extent efforts are to be made for collection of receivables.

     In judging the credit worthiness of the applicant, the factors to be considered by the firm are of three C’s (1) character (2) capacity (3) collateral. Character refers to willingness to pay, capacity refers to ability to pay and collateral represents the security offered by the firm in the form of mortgages

 Against this background, one of the essential credit management strategies to be evolved is to carry out effective forfaiting services. Forfaiting is a type of finance of receivables pertaining to international trade. It denotes the purchase of trade bills/promissory notes by a bank/financial institution without recourse to the seller. The purchase is in the form of discounting the documents covering the entire risk of nonpayment in collection. All risks and collection problems are fully the responsibility of the purchaser (forfaiter) who pays cash to the seller after discounting the bills/notes. Further it described as a cross border factoring which has common features of non-recourse and advance payment. A forfaiter discounts the entire value of the note/bill. The implication is that forfaiting is hundred per cent financing arrangement of receivables finance. The availing bank which provides an unconditional and irrevocable guarantee is a critical element in the forfaiting arrangement. The forfaiter’s decision to provide financing depends upon the financial standing of the availing bank. Forfaiting is a pure financing arrangement also includes ledger administration, collection and so on. Forfaiting finances notes/ bills arising out of deferred credit transactionspread3-5years.

In addition to the above, it is felt that, the threshold of credit augments the sales and the profits and on the other hand, contraction of credit hinders the sales and also amplifies the administrative costs incurred in collecting the debts from customers globally.The salient features of forfaiting as a form of export linked financing are summarized below:

    In pursuance of a commercial contract between an exporter and importer, the exporter sells and delivers the goods to the importer on deferred payment basis. The importer draws a series of promissory notes in favor of the exporter for payment including interest charge. Alternatively the exporter draws a series of bills which are accepted by the importer. The bills/notes are sent to the exporter. The promissory notes / bills are guaranteed by a bank which may not necessarily be the importer’s bank. The guarantee by the bank is referred to as an Aval which is defined as an endorsement by a bank guaranteeing payment by the buyer (importer).

The exporter enters into a forfaiting arrangements with a forfaiter which is usually a reputed bank including exporter’s bank. The exporter sells the avalled notes/bills to the bank (forfaiter) at discount recourse. The agreement provides for the basic terms of the arrangement such as cost of forfaiting margin to cover risk, commitment charges, days of grace, fee to compensate the forfaiter for loss of interest due to transfer and payment delays, period of forfaiting contract, installment of repayment, usually bi-annual installment and rate of interest and so on. The rate of interest/discount charged by the forfaiter depends upon the terms of the note/bill the currency in which it is denominated, the credit rating of the availing bank, the country risk of the importer etc. Payment to forfaiter by the exporter of the face value of the bill/note less discount: The forfaiter may hold these notes/bills till maturity for payment by the importer’s bank. Alternatively, he can secure them and sell the short term paper in the secondary market as high yielding unsecured paper.

On the basis of the features built into the Forfaiting deal to cater the varying needs of the trade/clients in international trade. It offers several advantages to a client including: (1) off-balance sheet financing, (2) reduction in current liabilities, (3) progress in current ratio; (4) higher credit standing (5) improved efficiency, (6) reduction of costs (7) additional sources of funds and so forth.

It is clear from the above; forfaiting is a source of financing of receivables and facilitates the process of their collection.