Export credit, forfeiting and trade finance risk
Domain scope
This domain tests pre-shipment and post-shipment export credit, forfeiting and the risks a trade financier prices. Know the difference between funding against documents and buying receivables outright.
Core rules
- Pre-shipment credit, often called packing credit, funds production or purchase before shipment. Post-shipment credit funds the period after shipment.
- ECGC cover protects against specified political and commercial risks; it is not a bank guarantee.
- Forfeiting is the discounting of medium-term receivables, usually backed by a letter of credit or guarantee, without recourse to the exporter.
- Without recourse is not absolute: it fails if documents are fraudulent or the underlying obligation is invalid.
- Key risks: country, buyer, bank, currency, tenor, documentation and fraud.
Worked example
A forfeiter buys a USD 1,000,000 receivable due in 180 days at 6% per annum, 360-day basis, plus a USD 2,000 fee. Discount is USD 1,000,000 x 6% x 180/360 = USD 30,000. Net proceeds are USD 1,000,000 minus USD 30,000 minus USD 2,000 = USD 968,000. The forfeiter bears the buyer or guarantor risk, not the exporter, subject to valid documents.
Traps that cost marks
- Treating forfeiting as a loan secured by the exporter.
- Assuming without recourse covers forged documents.
- Confusing ECGC cover with an unconditional guarantee.
- Ignoring the discount basis and fee.
- Mixing pre-shipment and post-shipment credit.