Letter of Credit (L/C) forfaiting allows an exporter to receive up–front payment for selling L/C–based receivables at a discount on a non–recourse basis.
The exporter seeking to hedge the insolvency risk of the L/C issuing bank and the country risk of the importer and receive payment upfront may approach an advising bank to purchase the L/C–based receivables at discount, giving up the right to collect full payment in the receivables to the said bank.
Benefits of L/C Forfaiting
Risk hedging
- Reduce non-payment risk while increasing the transaction volume with the importer under flexible payment terms
- Shift insolvency risk of the L/C issuing bank to the advising bank
Improving balance sheets
- Optimize balance sheets by taking the receivables off the balance sheet (please consult with your professional accountant)
Reducing management burden
- Reduce the burden of collecting the receivables from the importer
Increasing competitiveness
- Allow for prolonged or flexible payment terms for competitiveness, while reducing payment risk of importer.
