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Forfaiting: An alternative to bank loans when buying from abroad

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With banks still proving reluctant to part with their cash, many UK SMEs are constantly on the lookout for new ways to generate cash. If you’re planning on importing stock or equipment from overseas then it might be worth considering forfaiting.

British packaging manufacturers Duo encountered forfaiting as they were planning on investing in a new plastic co-extrusion machine, worth £750,000. Despite being able to demonstrate strong turnover growth, they had difficulty raising the money from traditional lenders, who tried to impose restrictive conditions or would only put up a relatively small proportion of the cash.

Duo’s FD, Paul Teasdale, says: “Investing in the co-ex machine was essential for the next stage of Duo’s growth so being able to access foreign capital markets at competitive rates helped speed up the investment process compared to UK alternatives.”

Whilst visiting prospective suppliers in Italy, it was recommended that Duo look into forfaiting, as an alternative to the banks.

Under this system the exporter is loaned money against the cost of the goods, so that they don’t have to wait a long time before being paid. The firm buying the equipment pays a small fee for insurance, in case they fail to repay in the future. 

In this case the scheme was backed by the Italian government, in a bid to boost exports.

Teasdale adds: “This spreads the risk for all parties involved and offers a number of advantages – the Italian manufacturer is certain of payment, our UK borrowing capacity is unaffected and, at the time, the outlook for the sterling to euro exchange rate made this a particularly attractive option.”

Teasdale says that they were really pleased with how the finance worked out, but there were a few problems. 

“Our bank in the UK hadn’t come across this kind of thing before so they took a long while to process the funds,” he says, adding that the system was sometimes a little bureaucratic to deal with.  

Forfaiting is mostly available in continental Europe and the developing world so while it is presently a good option for those seeking equipment from abroad, exporters are less likely to be able to make use of it. 

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