Differences Between Trade Financing And Trade Forfaiting
Expansion of business horizons overseas is a significant move that ensures long-term business growth. However, the initial period of establishing an export business can be full of hassles in terms of receiving payments or delays in following up with orders.
KredX helps exporters to tide over such situations and make international trade convenient. Trade financing and trade forfaiting are robust sources of export or pre and post-shipment financing that helps entrepreneurs effectively sail through cross-border transactions effectively.
What Is Trade Financing?
Trade financing accelerates international trade flows and commerce. However, it is different from conventional financing choices. The financing choice will help exporters as a backup against the inherent risks associated with international trading.
Trade financing encompasses several financial products that trade financing companies use to make trade transactions feasible. While conventional financing combats liquidity issues, trade financing, besides bridging liquidity gaps, protects exporters from potential risks that can jeopardise their business intent while trading overseas.
What Is Trade Forfaiting?
In trade forfaiting, exporters sell their medium and long-term foreign receivables at a discounted price via an intermediary. It is an effective type of export financing that allows exporters to access funds and avoid credit risk. In addition, it enables exporters to escape risks that might arise from changes made to the interest rate or exchange rate.
Exporters can seek the assistance from KredX for specialised financial assistance. The company takes the risk of exporters in return for a considerable margin. It is an effective way to get cash sales from credit sales.
Differences Between Trade Financing And Forfaiting
Trade financing and trade forfaiting are different in terms of concept, nature and scope. Here are their differences:
- Trade financing involves the sale of an exporter’s receivables to another firm. On the other hand, trade factoring involves the exporter’s renouncement of due to the forfaiter in return for substantial cash.
- Exporters can access around 80 to 90% of finances through trade financing, whereas, under trade forfaiting exporters can access 100% funds of the total export value.
- Another distinguishing point between these two terms is that the trade financing can be recourse or non-recourse. On the other hand, trade forfaiting is non-recourse at all times.
- Trade financing does not deal with negotiable financial instruments. On the other hand, trade forfaiting deals with negotiable instruments like promissory note, bills of exchange etc.
- The cost associated with financing is borne by clients or sellers. On the contrary, the overseas buyers bear the forfaiting cost.
Trade forfaiting and financing are effective services extended to an exporter or seller to establish them in the international market. It involves the robust backing of a third-party financier.
To curb the currency fluctuation risk and boost business cash flow, exporters can opt for pre-shipment and post-shipment financing options from any leading FinTech service providers and boost the optimal functionality of overseas transactions.