1. Introduction
    This chapter describes the forfaiting transaction (illustrated above), a device often used when a seller has agreed to supply high-value equipment to a buyer with extended financing provided by a separate financier. In many cases, the buyer has insufficient credit to qualify for such financing without an independent party’s guarantee. The guarantor may be the buyer’s bank or a government agency that subsidizes such acquisitions, and the form of the guaranty is an aval, a civil law creature not well understood in common law countries. The transaction works quite well, however, in most trading countries, including countries that are common law jurisdictions.


  1. Promissory Notes
    In a forfaiting transaction, the seller generally agrees to take the buyer’s promissory notes or accepted drafts in payment for the goods that are the subject of the international sales contract. However, the seller may not be comfortable with the buyer’s credit and may be unwilling to assume the risk that the buyer will not pay the notes as they come due. The notes may cover payments over a period of several years, with, say, 10% coming due each year for a period of ten years following the delivery of the goods. Even if the seller is satisfied with the buyer’s credit standing, the seller may choose to discount or forfait the buyer’s notes at comparatively low interest rates and without recourse if it is able to arrange for a forfaiter to buy the notes. This puts the seller in cash and allows it to close the transaction off its books.

  1. The Aval
    In either event, the seller agrees to ship the goods and the buyer delivers its notes or accepted drafts to the seller, often by means of a documentary draft collection, which is discussed in the next chapter. Unless the buyer is financially strong and well known, the notes will be required to bear an aval, i.e. a guaranty by a stronger party, which might be the buyer’s bank, the buyer’s owner or a government agency of the state where the buyer is located. The aval consists of the guarantor’s signature on the promissory note together with the very simple notation “per aval”.

  1. The Forfaiting Bank
    When the seller receives the notes, it immediately takes them to the forfaiter, a bank or other financial institution that has committed in advance to fund the forfaiting transaction. The forfaiter purchases the notes without recourse, i.e. it takes the notes from the seller on the understanding that, in the event that the buyer and the guarantor/avaliser default on the notes, it will not have recourse against the seller. In other words, the forfaiter will not have the right to ask the seller to make good the forfaiter’s loss.

  1. Reducing Credit Risk
    The benefit of the transaction lies in the fact that the buyer gets extended financing while the seller takes the credit risk only momentarily, as the forfaiter takes the seller out of the equation by paying the seller the face amount of the notes (or a discounted amount) shortly after the seller ships the goods and receives the avalized notes from the buyer. The risk that the seller takes is that the buyer may breach the sale agreement by failing to deliver the avalized notes to begin with. This is much the same as the risk of selling on sight draft terms, as the next chapter explains.