DRAFT
Improving the SMEs Access to Trade Finance
in the OIC Member States
97
receipt and processing of the documents. Release of the Guarantee occurs after the surrender
of the original bills of lading to the Steamship Company.
5. Forfaiting
Forfaiting is the sale of an export receivables transaction to a 3rd party for immediate payment
at a discount. It includes a number of different underlying instruments including:
Bills of exchange/promissory notes – negotiable instruments which provide for payment
of a fixed sum on a fixed future date and which can be transferred to third parties through
endorsement, assignment or novation. These instruments can also be used in other
Traditional Trade Finance solutions.
Deferred payment letters of credit
Loans and payment undertakings/receivables including open account receivables
Any other trade finance instrument that has a fixed value and maturity date
Forfaiting differs from factoring in that it is transaction-based as opposed to pool-based, and
typically has relatively large transaction sizes. Forfaiting instruments may also carry the
guarantee of a bank or foreign government. Transactions normally have a tenor of 6 months to
medium-term (3-5 years), but may range from less than 6 months to upwards of 10 years.
Forfaiters may hold the assets to maturity or trade them in a well-established secondary
market.
Product Definitions for Open Account Trade Finance
BAFT-IFSA, December, 2010
Section 1: Introduction
Banks have provided trade finance services such as processing purchase orders and managing
shipping information and associated documentation and have provided financing through
traditional trade finance products (namely letters of credit) for centuries. With the advent of
the internet and new technologies, the way buyers and sellers interact has evolved. More and
more, trade transactions are handled on Open Account terms yet the need for Open Account
transaction processing, servicing and financing (that build on the core trade services that
banks have long provided) remains.
Open Account is a common trade term generally used by buyers to pay their suppliers for the
purchase of goods without necessarily requiring 3rd party payment guarantees. New
technologies facilitate collaboration among supply chain partners and provide more precise
information, and thus allow banks to provide processing and financing services at various
points throughout the life cycle of a trade transaction. These products and services are
beneficial to buyers and sellers who have been developing deeper and more collaborative
relationships to strengthen their supply chains to gain competitive advantage.
Given the rapid growth of Open Account trade there is a need for common understanding of
the terminology used in these transactions. BAFT-IFSA, as part of its mandate to evaluate and
guide standardization, improve risk management and enhance the role and relevance of
financial institutions, has established the following definitions to provide clarity on Open
Account-related products and services. They describe Open Account life cycles and identify