International Factoring

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. 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 the 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 explaining the terms of factoring. 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.

International Factoring

Process of International Factoring

The process of international factoring is based on the same principles as 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 factors.

The export factor is responsible for collecting the documents and ensuring the payment to the exporter. On the other hand, the import factor verifies the credibility of the importer and collects 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. The 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 hands 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 invoice’s due date. The import factor then transfers the payment to the export factor, who then pays the exporter the balance amount (if any). Usually, the 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, boosts working capital.
  • Helps to expand reach in the foreign market.
  • Protection against bad debts and insolvency of foreign customers.

Pricing and Dispute

In international factoring also, factors charge a commission. Several factors also offer tailor-made factoring solutions based on the client-specific needs and the country they are doing business in.  The charge for the customized solution is, of course, higher.

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) – 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 transactions to ensure all the commercial transaction processes smoothly. Such a commoditized process also leads to a lower commission.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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