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Forfaiting


 

Introduction

Forfaiting means that Bank of China purchases the outstanding claims resulting from goods, services or asset transactions without recourse. Usually the outstanding claims have been accepted/undertaken/avalised to make payment by financial institutions. The acceptable types of outstanding claims in forfaiting by Bank of China include: L/C, bills of exchange, promissory notes, outstanding claims guaranteed by payment guarantee/standby L/C, outstanding claims guaranteed by export credit insurance, outstanding claims guaranteed by international organizations such as IFC (International Finance Corporation), and other acceptable credit instruments.
Functions

Forfaiting business enables a customer to receive non-recourse payments with fixed rate and without taking up his credit line, so that it can meet the customer's needs in avoiding risks, increasing cash flow, improving financial statements and receiving tax rebates earlier. At present, the types of forfaiting are as follows:

1. Forfaiting under a usance L/C.

As applied by the customer, Bank of China purchases non-recourse outstanding accounts receivable confirmed/undertaken by the issuing bank under the negotiation, acceptance or deferred payment L/C.

2. Forfaiting under a sight L/C.

Under sight negotiable L/C, Bank of China, as the nominated negotiating bank, purchases accounts payable of the issuing bank without recourse upon strict examination to ensure that documents are consistent with L/C.

3. Forfaiting under D/A.

Under the D/A (documents against acceptance), at the customer's request, Bank of China purchases the accepted commercial drafts avalised by a bank without recourse.

4. Forfaiting under domestic L/C.

Under the domestic deferred payment L/C and the negotiable deferred payment L/C, upon receipt of the authentic and valid payment confirmation at maturity from the issuing bank, Bank of China purchases the non-recourse outstanding claims from customers.

5. Forfaiting under the credit insurance (non-recourse Rong Xin Da).

For the export trade covered by export credit insurance, Bank of China purchases outstanding claims against documents, export credit policy and claim transfer agreement without recourse.

6. Forfaiting guaranteed by IFC or other international organizations.

As the Global Trade Finance Program Agreement participant (as a confirming bank) of the IFC, ADB, EBRD and IDB, Bank of China, with guarantees of international organizations, purchases outstanding claims from customers without recourse.

Features

1. Purchase without recourse. Bank of China purchases accounts receivable without recourse to secure customer's accounts receivable.

2. Mitigate risks. Customers transfer such risks as nation risk, credit risk, exchange rate risk and interest rate risk to Bank of China with the purpose to mitigate risks.

3. Not occupy the customer's credit line. One advantage of forfaiting is that it doesn't occupy the customer's credit line. The customer can still get financing from Bank of China without credit line or with insufficient credit line.

4. Increase working capital. Customers obtain 100% financing, turning the future accounts receivable into current cash flows so as to avoid capital occupation and increase cash flow.

5. Optimize the financial statements. Customers can reduce accounts receivable and improve cash flows without increasing liabilities, so that the financial statements can be optimized.

6. Obtain the export tax rebate in advance. According to the regulations of the State Administration of Foreign Exchange, customers can receive export tax rebate earlier to save financial costs through forfaiting.

Term

Bank of China can provide short-term financing (less than one year), as well as mid- and long-term financing (three to five years or even longer).

Target Customers

1. Customers who have limited working capital and need to accelerate turnover rate of accounts receivable.

2. Customers who want to mitigate the credit risk, nation risk, interest rate risk and exchange rate risk faced by the long-term accounts receivable.

3. Customers who have insufficient credit line or no credit line with the banks.

4. Customers who want to obtain the export tax rebate in advance.

Process

1. The customer and Bank of China sign the Forfaiting Contract.

2. The customer submits to Bank of China a Forfaiting Application Form.

3. Bank of China signs Forfaiting Confirmation with the customer after obtaining the debtor's credit line or confirming transfer of outstanding claims.
4. Transfer outstanding claims. In case the customer holds bills, the bill is endorsed to Bank of China; in case the bills are not available, the customer and Bank of China sign Notice of Assignment.

5. Make discounted payment. Upon receipt of acceptance/undertaking notice of the issuing bank/nominated bank under the L/C or other certificate of claims in line with the requirements, Bank of China pays the customer the net proceeds after deducting discount interest and related fees.

6. Under the export trade, Bank of China presents the customer with the special form for the verification certificate of export trade collection for handling verification on export trade collection and tax rebate.

Kind Reminder

1. Outstanding claims related to forfaiting business should be legal, authentic, valid and have no any mortgage or pledge;

2. Under the payment forms of L/C and collection, applying for forfaiting business through Bank of China is more convenient;

3. Under the D/A collection, some related banks should avalise a bill of exchange or provide guarantees;

4. Selecting an issuing bank or an accepting/undertaking bank with good credit standing is conducive to obtaining preferential rate;

5. In the early stage of the business, Bank of China can provide comprehensive consulting services, design personalized financing solutions to you, and commit to purchasing your outstanding claims at the agreed price and terms in the future. In this case, you may pay a commitment fee depending on the length of the commitment period.

Case

Company A (a Chinese machinery and equipment manufacturing enterprise) intends to export machinery and equipment to Company B in the Middle East. The equipment market is a buyer's market with fierce competition. Company A faces the following situation:

(1) Company B lacks capital and the its financing cost is high. Company B hopes Company A to render convenience of forward payment with a term of one year. Company A is in the rapid development period with large demand for capital, and its credit line in the bank is basically used up.

(2) Company B has an average business scale and credit standing. Although Company B agrees to pay by L/C, but the issuing bank C is small in scale and Company A knows little about the bank.

(3) Company A expects that RMB to appreciate within one year. If collecting money one year later, it is likely to face greater exchange rate risk.
Company A turns to Bank of China for solutions.

To meet the Company A's demand in terms of corporate financing, mitigating risks, reducing accounts receivable, Bank of China designs forfaiting solution. Company A finally adopted the solution, and successfully included financial costs into commodity price in the business negotiation. The business procedures are as follows:

(1) Bank C issued a usance L/C to be accepted 360 days after sight.

(2) After delivery of goods, Company A prepared documents and submitted them to Bank of China.

(3) After examining the documents, Bank of China sent the documents by courier to Bank C.

(4) Bank C accepted the documents and confirmed payment at maturity to Bank of China.

(5) Bank of China occupied Bank C's credit line, provided non-recourse discounted financing for Company A and credited the amount into Company A's account.
(6) Bank of China issued the special form of the verification certificate of export trade collection for Company A, and Company A handled verification of export trade collection and tax rebate by virtue of the special form.

By forfaiting, Company A not only won the customer by providing deferred payment terms, but also obtained non-recourse financing without occupying credit line, so that it overcame the fund shortage, and effectively mitigated risks arising from deferred payment such as credit risk, nation risk and exchange rate risk, as well as obtained the tax rebate earlier, turned accounts receivable into cash, and optimized the company's financial statements.

Our Advantages

Bank of China boasts high-quality professional talents specializing in forfaiting products, as well as rich forfaiting operation experience, centralized management and operation models. Representative of Bank of China serves as Non-executive Board Director of International Forfaiting Association (IFA) and Chairman of Northeast Asia Committee.

Bank of China offers a broad range of forfaiting products, free from limitation of settlement methods. The financing credit instruments are flexible, including not only L/C but also bills of exchange/promissory notes, outstanding claims guaranteed by payment guarantee/standby L/C, outstanding claims guaranteed by export credit insurance. It also provides personalized solutions depending on specific circumstances.

Relying on extensive branches and agency network, Bank of China has a superior capability of risk tolerance. Bank of China is the first Chinese bank joining the trade finance program of four global trade organizations like IFC, ADB, EBRD and IDB as a confirming bank and the bank has presently extended relevant business across emerging markets in Asia, Africa and Latin America through close cooperation with these international organizations. The financing terms are flexible, providing not only the short-term financing (less than one year), but also mid- and long-term financing (three to five years or even longer). 

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