Forfaiting

Part of speech: noun

Definitions

1. Purchasing an exporter's medium-term trade debts at a discount, taking on the risk of nonpayment without any claim against the seller
2. The financing practice of buying promissory notes or bills from an exporter at a reduced price, with no recourse back to the seller
3. Discounted purchase of receivables arising from international trade, where the buyer accepts the credit risk and cannot reclaim the money

Etymology: Forfaiting takes its name from the French phrase "à forfait", meaning "at a fixed price." The older French noun "forfait" carried a darker sense, a crime or breach of duty. That meaning came from "forfaire", to transgress, formed from "fors" (outside) and "faire" (to do), so to act beyond what was lawful or due. The financial sense grew from the idea of giving up a claim in exchange for a set sum. An exporter who wanted cash at once could sell a debt, such as a promissory note from a foreign buyer, to a bank. The bank paid a discounted amount and took on the risk of non-payment. Because the exporter gave up any further claim on the debt, the arrangement is described as being "without recourse," meaning the bank could not turn back to the seller if the buyer defaulted.