Last year Minsheng Bank and CITC launched a Chinese Letter of Credit blockchain. On Friday, the Bank of China and the same two banks announced another trade finance blockchain. This time it’s a forfaiting trading platform. So far they’ve executed six transactions worth $4.2 million.
This initiative focuses on forfaiting as opposed to the more common factoring whereby a supplier receives early payment of an invoice.
Forfaiting is similar to factoring but differs in several ways. Forfaiting is always for exported goods, usually for significant amounts of at least $100,000 in sales of commodities or capital goods. The term is commonly longer than factoring at 1-3 years. With forfaiting, the supplier receives the money and if the buyer defaults, there is no recourse to the supplier.
Perhaps the biggest difference is the debt instrument is usually a bill of exchange or promissory notes which is tradeable. Hence banks that advance the funds can trade the bills between each other. And this trading solution is what the Chinese consortium has developed.
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