There are classic ways of financing certain types of projects and then sometimes you need to work with the alternatives to make things work out well. In trade finance, there is such an alternative financing tool that is called forfaiting.
The aim of forfaiting is to eliminate risk of nonpayment by the importer if they are perceived as risky for credit by the exporter. Forfaiting is a non-recourse sale by the exporter of a bank guarantee from the importer’s bank. At that time the exporter receives immediate payment just as the guarantee is sold to the forfaiter. This way the risk of nonpayment to the exporter is removed because is transferred to the forfaiter firm.
To the forfaiter, the agreement to finance the transaction is based upon the fixed discount rate agreed to by the exporter to facilitate the transaction. The forfaiter thereby holds the financial note of the agreement until maturity of the international trade transaction; when that time comes, the payment is collected by the forfaiter or investors that may have purchased the note. (see illustration below for clarification)
Always make sure you make an informed decision in all cases,
All the Best,