Forfeiting Contract and Its Features
20.04.2008
Mehmet Taş,Attorney at Law
Forfeiting is described as the purchase1 of collectable receivables arising from exporting commodities or services by a finance institution or bank, subject to being unable to take recourse against the seller. Forfeiting is a flexible and alternative method of financing in comparison to traditional commercial funding techniques and it yields particularly beneficial results in commerce made with purchasers located in developed countries. Forfeiting is used in international commercial arena particularly in western European countries.
Forfeiting is basically a funding method used in foreign trade. Forfeiter purchases some credit instruments such as letter of guarantee, bill of lading, bond and other documents that may be circulated and independent from basic relation are purchased by the forfeiter from exporter and cash payment is made to the exporter in consideration of the same after deducting a certain amount of commission2.
Forfeiting is generally used in commercial relations bearing long term receivables (1 to 5 years). In case of international sales, if there is a long interval between manufacture of goods until collection of commodity prices after execution of sale contract; exporters make forfeiting contracts to ensure early funding for the manufacture to be made and also to eliminate the risk of being unable to collect receivables.
In practice, the process of forfeiting operates in the following manner. First of all, importer and exporter make a goods purchase agreement. Exporter applies to forfeiter to finance the goods that he must deliver to the importer under such contract. Forfeiter demands some details from the exporter such as identity and nationality of the importer, the commodities sold and their nature, details regarding validity and value of purchase agreement and date and term of agreement, furthermore time and terms of payment and interest rate agreed to be paid with the importer, if any, again documents to be used for debt (bond, bill of lading, letter of guarantee) and details regarding the person guaranteeing payment3.
Having fully comprehended the terms of such purchase contract, the forfeiter notifies the discount he may make to the exporter. Subsequent to exporterâs agreeing the terms and conditions of the forfeiter, a forfeiting contract is signed between the parties. Such contract is independent from basic purchase contract between the exporter and importer. The exporter must inform importer about forfeiting contract4. Hereafter importer shall make payment to forfeiter, not to the exporter.
After this, forfeiter guarantees to the bank of importer that in case of delivery of documents regarding cost, documents related to commodity shall be delivered. At this stage, the importer submits payment documents, bill etc. which are consideration for the goods he wants to purchase to his own bank and requests delivery of payment documents to forfeiter in case of delivery of documents representing commodities. If credit worthiness of importer is not very good, the bank of the importer may be demanded to provide guarantee or aval to such payment documents. The exporter, having sent the goods, submits to the forfeiter documents related to shipment of commodities. Forfeiter submits such documents to the bank of the importer and collects payment documents from the bank of the importer.
After conclusion of forfeiting contract, during the stage when the exporter has not dispatched goods yet and prior to importerâs sending cash against documents to the forfeiter, the forfeiter does not make any payment to the exporter. However, the parties are bound by the forfeiting contract and forfeiter shall pay the forfeiting price to the exporter at the moment of delivery of documents representing the goods exported to the forfeiter5.
Bond, bill of lading and policies are the most commonly used debt instruments in forfeiting. Sometimes, debt instruments used in forfeiting are prepared by the exporter and accepted by the importer and an aval or unconditional guarantee is provided. Guarantee is normally provided by the bank of the importer. However, documents without bank guarantee of some powerful companies may be accepted.
Forfeiter makes payment to the exporter in consideration of a copy of goods purchase contract, a signed invoice, way bill, railway invoice or equivalent documents, a letter of guarantee signed and certified by guarantor of the importer or a document for which aval is provided6.
Forfeiters make advance payment to exporters by applying a certain discount according to maturity, collectibility of receivables purchased during forfeiter transactions and also interest. Sometimes, exporters may assume some charges to make terms contained in purchase agreement more reasonable for the buyer.
Charges depend on the level of interest rates that are valid when forfeiter makes a commitment. The payment made by forfeiter to exporter and the discounted part of the same covers political, economical and commercial risks at the country of importer and bank providing aval or guaranteeing, these may vary from country to country and even from guarantor to guarantor. Furthermore, in case of delay of payments to be made from the country of debtor, penalty for delay may be collected in addition.
Forfeiter, against the payment made to exporter, takes over the right to demand receivable from importer. Forfeiter, at his discretion, may hold the bonds until their maturity or sells them to another investor on condition of being not responsible.
One of the most significant features of forfeiting agreement is charging the forfeiter with risks of collection of bond and bill of lading or policy that would be submitted by importer to the exporter as cost. That is, forfeiter assumes the risk of collecting from importer the documents constituting payment of commodities to be sold by exporter.
Furthermore, exporter can promptly cash in the deferred claims related to commodities he has sold. In this way, he eliminates possible foreign exchange rate losses he may incur because of his receivable in foreign currency. Also, it is possible to calculate forfeiting expenses well in advance and reflect the same to selling price7.
Another feature of forfeiting transaction is that commission rates in forfeiting are lower than interest rates to accrue in case of utilization of medium term loan related to the commodity sold8. In this way, exporter pays a lower price by making forfeiting than prices to be paid in case of using loan.
Forfeiting contract normally expires upon collection of forfeiter the receivables it took over at the maturity or death, bankruptcy of either party or if parties are legal persons, disappearance of their legal personality9.
1Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, s. 149
2Jack MORAN, Credit Research Foundation, Third Quarter, 1999 s: 1
3Jack MORAN, Credit Research Foundation, Third Quarter, 1999 s: 2
4Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, 4. bası, s. 166
5 Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, s. 164
6Jack MORAN, Credit Research Foundation, Third Quarter, 1999 s: 2
7Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, s. 147
8Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, s. 147
9Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, s. 170-171
Forfeiting is described as the purchase1 of collectable receivables arising from exporting commodities or services by a finance institution or bank, subject to being unable to take recourse against the seller. Forfeiting is a flexible and alternative method of financing in comparison to traditional commercial funding techniques and it yields particularly beneficial results in commerce made with purchasers located in developed countries. Forfeiting is used in international commercial arena particularly in western European countries.
Forfeiting is basically a funding method used in foreign trade. Forfeiter purchases some credit instruments such as letter of guarantee, bill of lading, bond and other documents that may be circulated and independent from basic relation are purchased by the forfeiter from exporter and cash payment is made to the exporter in consideration of the same after deducting a certain amount of commission2.
Forfeiting is generally used in commercial relations bearing long term receivables (1 to 5 years). In case of international sales, if there is a long interval between manufacture of goods until collection of commodity prices after execution of sale contract; exporters make forfeiting contracts to ensure early funding for the manufacture to be made and also to eliminate the risk of being unable to collect receivables.
In practice, the process of forfeiting operates in the following manner. First of all, importer and exporter make a goods purchase agreement. Exporter applies to forfeiter to finance the goods that he must deliver to the importer under such contract. Forfeiter demands some details from the exporter such as identity and nationality of the importer, the commodities sold and their nature, details regarding validity and value of purchase agreement and date and term of agreement, furthermore time and terms of payment and interest rate agreed to be paid with the importer, if any, again documents to be used for debt (bond, bill of lading, letter of guarantee) and details regarding the person guaranteeing payment3.
Having fully comprehended the terms of such purchase contract, the forfeiter notifies the discount he may make to the exporter. Subsequent to exporterâs agreeing the terms and conditions of the forfeiter, a forfeiting contract is signed between the parties. Such contract is independent from basic purchase contract between the exporter and importer. The exporter must inform importer about forfeiting contract4. Hereafter importer shall make payment to forfeiter, not to the exporter.
After this, forfeiter guarantees to the bank of importer that in case of delivery of documents regarding cost, documents related to commodity shall be delivered. At this stage, the importer submits payment documents, bill etc. which are consideration for the goods he wants to purchase to his own bank and requests delivery of payment documents to forfeiter in case of delivery of documents representing commodities. If credit worthiness of importer is not very good, the bank of the importer may be demanded to provide guarantee or aval to such payment documents. The exporter, having sent the goods, submits to the forfeiter documents related to shipment of commodities. Forfeiter submits such documents to the bank of the importer and collects payment documents from the bank of the importer.
After conclusion of forfeiting contract, during the stage when the exporter has not dispatched goods yet and prior to importerâs sending cash against documents to the forfeiter, the forfeiter does not make any payment to the exporter. However, the parties are bound by the forfeiting contract and forfeiter shall pay the forfeiting price to the exporter at the moment of delivery of documents representing the goods exported to the forfeiter5.
Bond, bill of lading and policies are the most commonly used debt instruments in forfeiting. Sometimes, debt instruments used in forfeiting are prepared by the exporter and accepted by the importer and an aval or unconditional guarantee is provided. Guarantee is normally provided by the bank of the importer. However, documents without bank guarantee of some powerful companies may be accepted.
Forfeiter makes payment to the exporter in consideration of a copy of goods purchase contract, a signed invoice, way bill, railway invoice or equivalent documents, a letter of guarantee signed and certified by guarantor of the importer or a document for which aval is provided6.
Forfeiters make advance payment to exporters by applying a certain discount according to maturity, collectibility of receivables purchased during forfeiter transactions and also interest. Sometimes, exporters may assume some charges to make terms contained in purchase agreement more reasonable for the buyer.
Charges depend on the level of interest rates that are valid when forfeiter makes a commitment. The payment made by forfeiter to exporter and the discounted part of the same covers political, economical and commercial risks at the country of importer and bank providing aval or guaranteeing, these may vary from country to country and even from guarantor to guarantor. Furthermore, in case of delay of payments to be made from the country of debtor, penalty for delay may be collected in addition.
Forfeiter, against the payment made to exporter, takes over the right to demand receivable from importer. Forfeiter, at his discretion, may hold the bonds until their maturity or sells them to another investor on condition of being not responsible.
One of the most significant features of forfeiting agreement is charging the forfeiter with risks of collection of bond and bill of lading or policy that would be submitted by importer to the exporter as cost. That is, forfeiter assumes the risk of collecting from importer the documents constituting payment of commodities to be sold by exporter.
Furthermore, exporter can promptly cash in the deferred claims related to commodities he has sold. In this way, he eliminates possible foreign exchange rate losses he may incur because of his receivable in foreign currency. Also, it is possible to calculate forfeiting expenses well in advance and reflect the same to selling price7.
Another feature of forfeiting transaction is that commission rates in forfeiting are lower than interest rates to accrue in case of utilization of medium term loan related to the commodity sold8. In this way, exporter pays a lower price by making forfeiting than prices to be paid in case of using loan.
Forfeiting contract normally expires upon collection of forfeiter the receivables it took over at the maturity or death, bankruptcy of either party or if parties are legal persons, disappearance of their legal personality9.
1Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, s. 149
2Jack MORAN, Credit Research Foundation, Third Quarter, 1999 s: 1
3Jack MORAN, Credit Research Foundation, Third Quarter, 1999 s: 2
4Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, 4. bası, s. 166
5 Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, s. 164
6Jack MORAN, Credit Research Foundation, Third Quarter, 1999 s: 2
7Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, s. 147
8Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, s. 147
9Cemal ŞANLI, Nuray EKŞİ, Uluslararası Ticaret Hukuku, s. 170-171
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