Forfaiting is the purchase of an exporter’s trade receivables at a discount to face value "without recourse" to the exporter. This discount will imply a fixed rate of interest to the maturity of the importer’s obligation. Once the goods have been shipped and the necessary satisfactory documentation obtained (such as shipping documents and commercial invoices), it is able to purchase the trade receivables (i.e. the importer’s debt obligations) and so assume the responsibility for the debts. Thus the exporter is free of credit, transfer, and political risks, and can then concentrate all his efforts on new business.

The trade receivables are usually evidenced by either deferred payments due under an Irrevocable deferred payment Letter of Credit or by negotiable instruments such as Bills of Exchange (accepted by the buyer) or Promissory Notes (issued by the buyer). Repayment is generally made against presentation of a series of such bills or notes maturing throughout the credit term, or automatically on the deferred payment dates of the Letter of Credit. It is usual to have these instruments guaranteed by the buyer’s bank. This guarantee can simply be achieved by the process of adding an aval or in a separate guarantee letter.

The risks which now no longer concern the exporter are borne by the bank which arranges to receive repayment from the overseas buyer and / or the buyer’s bank (the guarantor). The buyer will benefit from the agreed period of credit together with the pre-agreed repayment dates and fixed interest rate on the outstanding amount of the debt.