VATFIN3235 - Credit, debts and related services: debts and related services: forfaiting

Description of service

Forfaiting, or ‘without recourse’ financing, is a method of trade finance whereby the forfaiter (normally a bank) purchases, on a ‘without recourse’ basis (see VATFIN3215), unconditional debts which have arisen from a supply of goods and/or services. It is most often used where goods and/or services are exported.

Forfaiting works as follows:

  • An exporter agrees to sell to the forfaiter its rights to the payments to the export in return for a discounted cash payment. This means that the exporter no longer bears the risk of non-payment by the importer and/or the guarantor of that importer.
  • In exchange for the payment, the forfaiter takes over the exporter’s debt and assumes the risk on the payment from the importer and/or the guarantor.

Supply and liability

The sale of the debt from the exporter to the forfaiter is exempt under Group 5, item 1. If the forfaiter then sells on that debt that supply is also exempt under Group 5, item 1.

If the forfaiter holds on to the debt until maturity any income realised from the debt is not consideration for any supply.