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What is International Factoring?
International Factoring is a must need service for the companies engaged in the import and export of goods and services. Companies engaged in international trade, regardless of their size and industry; often face a demand from the importers for an account trade and longer payment terms. This means, getting the payment weeks after the invoice date.
And, this is where International Factoring comes in. It basically acts as export insurance. The exporter hires the factor, who in turn guarantees the import price of the goods to the exporter. Simply, we can say that factor is responsible for the cash flow from the importer to the exporter.
Types of International Factoring
There are four types of International Factoring:
Two Factor System
Under this system, the transaction involves four parties; exporter, importer, import factor in importer’s country and export factor in exporter’s country. This is the most used factoring (the process of Two Factor System is discussed later in the article).
Single Factoring System
Under this system, the factoring companies in the exporting and importing countries sign a special agreement. The agreement stipulates that only one factoring agency would perform all the functions.
Direct Export Factoring
Under this system, only the export factor is involved. The export factor takes care of all the functions. Such a system helps in lowering the cost.
Direct Import Factoring
Under this, the seller transacts directly with the factor in the importer’s countries. The import factor carries all the functions.
Process of International Factoring
The process of international factoring is based on the same principles as the domestic factoring. The difference, however, is that the buyer and seller are located in different countries. Also, International Factoring usually involves two factors – import and export factor.
The export factor is responsible for collecting the documents and ensuring the payment to the exporter. Import factor, on the other hand, verifies the credibility of the importer and collect the dues on time.
The process of international factoring starts after an exporter requests the export factor for a limit approval on the importer. The export factor then forwards the same requests to the import factor located in the importer’s country. Import factor then checks the financial reputation of the importer, and if found okay, conveys the approval to the export factor.
The export factor then conveys the same to the exporter, who then starts the factoring arrangement. The exporter then ships the goods to the importer, and hand over the documents to the export factor. The export factor then releases the pre-agreed payment to the exporter, and also sends the documents to the importer and the import factor.
The importer then pays the import factor on the due date of the invoice. Import factor then transfers the payment to the export factor, who then pays the exporter the balance amount (if any). Usually, factor pays 80% of the purchase price when the contract is signed. The balance (less factor’s fee) is paid after the delivery or after the due date of the invoice or as agreed.
Advantages of International Factoring
Apart from lowering your credit risk, International Factoring offers several benefits:
- Information on the current and prospective foreign clients.
- Overcome issues related to foreign customs and languages.
- Carrying business in a secure atmosphere.
- Less documentation than other similar options like LC resulting in lower cost.
- Ensures timely cash flow, and thus, boost working capital.
- Helps to expand reach in the foreign market.
- Protection against bad debts and insolvency of the foreign customers.
Pricing and Dispute
In international factoring also, factors charge a commission. Several factors also offer tailor-made factoring solutions, which are based on the client-specific needs and the country they are doing business in. The charge for the customized solution is of course higher.
An organization named FCI (Factors Chain International) has set some rules for governing the disputes if any. It is the leading organization monitoring factoring. FCI has a set of rules – called the General Rules on International Factoring (GRIF Rules) – that is followed by the leading companies involved in providing factoring services.
Factoring service under the GRIF Rules is a highly commoditized process. Standards are available for almost all the processes involving international factoring transaction to ensure all the commercial transaction processes smoothly. Such a commoditized process also leads to a lower commission.Last updated on : October 10th, 2018