Forfaiting

The act of middle-manning between an importer and an exporter when the goods in question are crazy expensive (at least six figs) and might not be paid for by the importer all at once.

Let’s say we make high-tech farming equipment. One of our products, Farm Drone, is a crop-dusting-capable drone that relays real-time info about the land, weather, crops, livestock, pollen count, etc. back to the farmer. These things are awesome, but they cost about $300,000 a pop. Luckily for us, we’ve got a client in Thailand who wants eight of them. He’s sure he can sell them to farmers in his region. “Right on,” we say, but before we ship a bunch of Farm Drones to Thailand, we’re gonna need some assurances that we’ll get paid.

Enter the forfaiter. What the forfaiter does is pay us for all eight Farm Drones up front. In turn, our importer in Thailand gives the forfaiter some form of promissory note for the amount owed. The forfaiter then collects the amount owed directly from the importer, usually over time, while we are free to use the money we received right away.

This process has pros and cons. Pros: We receive payment for our drones all at once. We have a lot less risk and liability with the whole transfer-of-goods thing, since we washed our hands of it when we sold the drones to the forfaiter. We’re also protected against foreign exchange rate fluctuations since we’ve received payment in full. The forfaiter—usually these things are handled by banks or other specialized lending institutions—makes money on the deal, since they’re brokering and insuring the transaction. And the importer, our good buddy in Thailand, doesn’t have to shell out five million bucks all at once. So that’s all nice.

But on the “con” side, forfaiting can be more expensive than other forms of financing. This might not affect us or the Farm Drones too much, but it usually affects the importer in a bad way. They could end up paying a lot more per Farm Drone than the sticker price. And there are some potential pitfalls for the forfaiter as well: if our buddy in Thailand defaults on his payments, it’s the forfaiter who’s assumed all the risk. In addition, certain countries might not even get to participate in forfaiting fun if their nation’s currency isn’t deemed stable enough. So that’s all...not as nice.