Procurement Glossary
Factoring: Definition, process, and application in Procurement
November 19, 2025
Forfaiting is an important financing instrument in international trade that helps companies minimize liquidity risks and protect against payment defaults. By selling receivables to specialized financial institutions, exporters can obtain immediate liquidity while transferring the credit risk to the forfaiter. Find out below what forfaiting means exactly, how the process works, and what strategic advantages it Procurement for Procurement .
Key Facts
- Forfaiting enables the non-recourse sale of export receivables to financial institutions.
- Typical terms range from 6 months to 7 years with a minimum volume of €100,000.
- The credit risk is transferred in full to the forfaiter, not just the payment risk.
- Mainly used for capital goods exports and project financing
- Requires collateral accepted by banks, such as bills of exchange or guarantees
Contents
What is forfaiting? Definition and process flow
Forfaiting is a specialized form of export financing that differs from other financing instruments in that it is non-recourse.
Fundamentals and characteristics
In forfaiting, an exporter sells its medium- to long-term receivables from an importer to a forfaiter. The sale is without recourse (à forfait), which means that the entire credit risk is transferred to the financial institution. The receivables must be secured by collateral accepted by banks, such as bank guarantees or bills of exchange.
Forfaiting vs. factoring
Unlike factoring, forfaiting focuses on international transactions with longer terms and higher volumes. While factoring in Procurement often involves short-term receivables, forfaiting is particularly suitable for capital goods exports with payment terms of several years.
The importance of forfaiting in Procurement
For purchasing organizations, forfaiting offers strategic advantages in supplier financing and risk minimization. By transferring payment risks, companies can optimize their balance sheet structure while offering suppliers attractive financing solutions.
Process steps and responsibilities
The forfaiting process requires a structured approach with clearly defined steps and responsibilities among all parties involved.
Preparation and documentation
First, all necessary documents must be prepared, including commercial contracts, delivery documents, and collateral. Claims must be secured by bank-accepted instruments such as exchange rate clauses or guarantees. Careful examination of the creditworthiness of the importer and their country is essential.
Negotiation and conclusion of contract
The forfaiting rate is negotiated based on the term, currency, country risk, and collateral. The terms typically include a discount rate plus a risk premium. In parallel to advance payment, forfaiting offers an alternative financing structure with lower liquidity requirements for the buyer.
Settlement and transfer
After conclusion of the contract, the receivables are transferred by endorsement or assignment. The forfaiteur pays out the discount amount and takes over all further collection activities. Integration into existing payment plans requires corresponding adjustments to internal processes.
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Key KPIs for forfaiting
Measuring the success of forfaiting activities requires specific key performance indicators that take both financial and operational aspects into account.
Cost efficiency key figures
The forfaiting rate in relation to alternative financing costs shows the economic efficiency. In addition, transaction costs, processing fees, and hidden costs should be recorded. A comparison with cash discount terms and other financing instruments enables informed decisions to be made.
Risk and liquidity indicators
The default rate on forfaiting receivables and the average processing time are important indicators. The ratio of forfaiting receivables to total export receivables shows the degree of coverage. The liquidity effect should be assessed in relation to other payment terms.
Operational efficiency metrics
The turnaround time from request to payment and the rejection rate of forfaiting applications measure operational efficiency. The number of inquiries and corrections per transaction indicates the quality of internal processes. Integration with dynamic discounting systems can enable additional efficiency gains.
Risks, dependencies and countermeasures
Although forfaiting transfers risks to the forfaiter, new dependencies and potential problem areas arise that must be carefully managed.
Cost risks and market volatility
Factoring costs can vary considerably depending on interest rates, country risk, and market liquidity. Companies should develop alternative sources of financing such as early payment programs in parallel. A diversified financing strategy reduces dependence on individual instruments.
Documentation and compliance risks
Incorrect or incomplete documentation can lead to the forfaiting being rejected. The risk of errors increases, particularly in complex international transactions involving different exchange rate fixings. Standardized processes and regular training minimize this risk.
Liquidity and timing risks
The availability of forfaiting capacity can change quickly, especially in times of crisis. Companies should conclude long-term framework agreements and maintain alternative sources of liquidity, such as credit limits with suppliers. Close coordination with the treasury department is essential.
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Practical example
A German engineering company exports a production plant worth €2 million to Brazil with a payment term of three years. Due to the country risk and the long term, the company decides to use forfaiting. The Brazilian importer provides a bank guarantee from its house bank. The German exporter sells the receivable to a forfaiter for €1.75 million, which provides it with immediate liquidity and eliminates the default risk.
- Immediate liquidity improvement of €1.75 million
- Complete transfer of risk to the forfaiteur
- Opportunity to reinvest in new projects
Current developments and effects
The forfaiting industry is subject to continuous change due to technological innovations, regulatory developments, and changing market conditions.
Digitization and automation
Modern forfaiting platforms use artificial intelligence for risk assessments and pricing. Blockchain technology enables more transparent documentation processes and significantly reduces processing times. These developments lead to more efficient processes and lower transaction costs for all parties involved.
ESG criteria and sustainable financing
Forfaiters are increasingly integrating environmental, social, and governance criteria into their assessment processes. Sustainable projects receive preferential terms, while environmentally harmful businesses incur higher risk premiums. This development is also influencing the design of supply chain finance programs.
Regulatory adjustments
Stricter compliance requirements and anti-money laundering regulations increase the amount of documentation required. At the same time, new opportunities are emerging as a result of regulatory relief for SME financing. This makes integration with reverse factoring solutions more complex, but also more standardized.
Conclusion
Forfaiting is a valuable financing instrument for international transactions that helps companies minimize liquidity risks and gain competitive advantages. The non-recourse transfer of receivables enables an optimized balance sheet structure and significantly reduces working capital. Despite higher costs compared to other financing instruments, the strategic advantages outweigh the disadvantages, especially in complex international projects with longer terms. Careful consideration of the cost-benefit ratio and integration into a holistic financing strategy are crucial for successful implementation.
FAQ
What distinguishes forfaiting from other financing instruments?
Forfaiting is non-recourse, meaning that the seller no longer bears any default risk. Unlike factoring, forfaiting focuses on medium to long-term international transactions with higher volumes and requires collateral accepted by banks. The minimum term is typically 6 months.
What requirements must be met for forfaiting?
The claim must be secured by bank-accepted collateral such as bills of exchange, guarantees, or letters of credit. The minimum volume is usually €100,000, with a term of between 6 months and 7 years. The debtor should have sufficient creditworthiness and come from an acceptable country.
How are factoring costs calculated?
The forfaiting costs consist of the base interest rate, a country risk premium, a bank risk premium, and a profit margin. In addition, processing fees and possible currency costs are incurred. The total costs are typically 2-6 percentage points above the reference interest rate.
What strategic advantages does forfaiting offer for Procurement?
Factoring enables an improved balance sheet structure through off-balance-sheet financing and reduces working capital. Companies can offer longer payment terms and thus gain competitive advantages. At the same time, receivables management is outsourced to specialists, which frees up internal resources.
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