Tadoo Inc. is a chemical company incorporated in the state of Tennessee and engaged in the production and sale of various chemical products used to kill harmful insects or strip leaves from trees. Since the company was established, in 1980, it has generated gross sales of more than $60 million, largely from sales in the United States and in Western Europe. Its sales agents and distributors are located in more than a dozen countries.
In September 2000, the Belgian government advertised for a purchase of $20 million in chemical products. The winner of the bid was required to provide financing for a period of two years. Given Tadoo’s inability to secure private or public financing for the sale, it decided to contact a forfaiter to explore the possibility of financing the deal. Tadoo provided the forfaiter with important details to establish the viability of the transaction, including the delivery date, repayment terms (four semiannual repayments over a two-year period), interest rate (payable by buyer), and a letter of credit instrument to be opened in favor of Tadoo through a Belgian bank.
The forfaiter calculated the expected costs (e.g., discount rate, commitment fees) necessary to sell the receivable and added it to the commercial contract so that Tadoo would be able to receive 100 percent of the required cash value. This helped Tadoo to submit a contract price that included financing expenses. The forfaiter also examined the structure of the transaction to ensure that it had maximum liquidity, including the financing period, country risk, and credit risk. The forfaiter was expected to resell the transaction in the market.
Prior to the submission of the bid, Tadoo entered into a detailed contract with the forfaiter. The contract required Tadoo to sell the receivable to the forfaiter and stated the terms and conditions of the contract. It also provided Tadoo the option to cancel the contract with no liability in the event that Tadoo failed to win the bid. A month after the submission of the bid, the Belgian government informed Tadoo that it had been awarded the contract.
Tadoo began to manufacture the product and supplied the product to the buyer in special shipping containers in accordance with the terms of the contract. Four bills of exchange were accepted by the Belgian Bank and later endorsed by Tadoo to the forfaiter without recourse and provided to the latter with supporting documentation. The forfaiter received and verified the documents and paid $20 million to Tadoo. Tadoo was required to honor all its contractual commitments pertaining to product support and warranty, but the financial risk associated with the bill of exchange maturing over a two-year period had been sold to the forfaiter without recourse.
Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.