Earlier I wrote about advantages and disadvantages of factoring this time I will be covering advantages and disadvantages of forfeiting.
Forfeiting can be defined as a form of financing of receivables pertaining to international trade, in other words it implies the purchase of trade bills by the bank without recourse to the seller. Hence in the event of nonpayment by the buyer bank will have to bear the losses and not seller. Here are some of the advantages of forfeiting –
1. Exporter gets better liquidity as the receivables get easily converted into cash on the presentation of the bill or promissory note.
2. There is no risk of exchange rate fluctuations.
3. It is simple as well as flexible in nature and hence can be altered to suit the requirements of the exporters.
However there are certain disadvantages also of forfeiting –
1. From bank point of view there is no legal framework to protect the banker or financial institution doing forfeiture and hence they face the risk in the form of political, exchange rate risk and other risk associate with foreign transactions.
2. It is very expensive from exporter point of view because banks take high fees for forfeiture due to high risks involved in it.
3. There is no secondary market for these types of instruments hence there is lack of liquidity for these instruments.