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Discounting

The general principles of invoice discounting are:

  • The exporter wants to maintain direct contact with the buyer and does not wish the buyer to be ware of his arrangement with the discounter.
  • The exporter sells his invoice to the discounter at an agreed discount.
  • The discounter advances the exporter the agreed percentage of the discounted value (say 80 percent).
  • When the buyer pays, or at an agreed date, the exporter repays the advance.

This kind of finance is provided:

  • Without recourse up to the amount of the Credit insurance available, and
  • With recourse to the exporter for any amount not so covered.

Aval

When a bill of exchange is not drawn under a documentary credit, the exporter draws it on the buyer. The buyer signifies that he accepts the bill by signing it on the front or the back. If the buyer does not pay the exporter in terms of the bill, the exporter can sue the buyer.

If the buyer and his bank so arrange, the buyer’s bank can guarantee payment of the bill by signing the back of it. The bank’s signature is often accompanied by the words “per aval”, so that the bill is said to be “avalised” by the buyer’s bank. An avalised bill guarantees payment of the bill by the buyer’s bank if the buyer does not pay. (Instead of signing the bill, the buyer’s bank may issue a separate guarantee in respect of the bill. The effect of this is also to guarantee the payment of the bill by the buyer’s bank.)

Promissory notes can be treated in the same way. In certain countries, bills of exchange attract stamp duty:

promissory notes (which do not attract duty) are preferred in such countries.

Forfaiting

“Forfaiting” – from à forfait (French) – means relinquishing or forfeiting one’s rights to something. An exporter can choose to relinquish his rights to claim payment for goods delivered to a buyer in return for a cash payment from a “forfaiter”. The forfaiter normally buys (at a discount) bills of exchange or promissory notes that have been accepted by a bank or are guaranteed by one, most often by avalisation or else by separate guarantee. Once the exporter has sold (relinquished his claim in) the bills of exchange or promissory notes, he has no further involvement in the collection of the debt.

Forfaiting can be useful to exporters who have either large contracts that involve payment over a long term or contracts on which credit insurance cannot be obtained (e.g. because the goods have significant foreign content). Forfaiting allows the exporter more certainty in bidding for new contracts because it enables him to fix the costs of financing and allow for them in his quotation.

General principles are as follows:

  • Finance is without recourse and is based upon the bill of exchange accepted by the buyer and guaranteed by the buyer’s bank by avalisation.
  • No credit insurance should be required from the exporter.
  • The exporter should expect to receive 100 per cent of invoice value, less any agreed discount, immediately and without recourse.
  • The method is used to finance the export of capital goods where repayment is over an extended term using avalised bills of progressive maturities over periods of up to two or three years.



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