The Role of Factoring in International Trade

For many companies, selling in an international market place is the ultimate challenge. While the rewards can be substantial, success can also bring its share of problems. Different customs, currency systems, laws and languages still create barriers to trade in a world where sophisticated computer technology allows orders abroad to be placed within seconds.

One of the greatest problems facing exporters is the increasing insistence by importers that trade be conducted on open account terms. This often means that payment is received many weeks or even months after delivery. Unsurprisingly, many organisations find that giving buyers credit in this way can cause severe cash flow problems. Further problems can arise if the importer delays payment beyond originally agreed terms or makes no payment at all because of financial failure.

International factoring provides a simple solution regardless of whether the exporter is a small organisation or a major corporation.

The role of the factor is to collect money owed from abroad by approaching importers in their own country, in their own language and in the locally accepted manner. As a result, distances and cultural differences cease to be a problem. A factor can also provide exporters with 100% protection against the importer’s inability to pay.

The advantages of export factoring have proved to be very attractive to international traders. It is now seen as an excellent alternative to other forms of trade finance and the role of the letter of credit is gradually diminishing as a consequence.

This means that the prospects for international factoring can be seen as favourable in all countries. Not only those that are highly industrialised, but also those that are still developing. In the future though, the real challenge for factoring companies will be to maintain their flexibility so that they can react quickly to changing market circumstances.

There is nothing complex about factoring. It is simply a unique package of services designed to ease the traditional problems of selling on open account. Typical services include investigating the creditworthiness of buyers, assuming credit risk and giving 100% protection against write-offs, collection and management of receivables and provision of finance through immediate cash advances against outstanding receivables.

When export factoring is carried out by members of Factors Chain International, the service normally involves a six-stage operation.

1. The exporter signs a factoring contract assigning all agreed receivables to an export factor. The factor then becomes responsible for all aspects of the factoring operation.
2. The export factor chooses an Factors Chain International correspondent to serve as an import factor in the country where goods are to be shipped. The receivables are then reassigned to the import factor.
3. At the same time, the import factor investigates the credit standing of the buyer of the exporter’s goods and establishes lines of credit. This allows the buyer to place an order on open account terms without opening letters of credit.
4. Once the goods have been shipped, the export factor may advance up to 80% of the invoice value to the exporter.
5. Once the sale has taken place, the import factor collects the full invoice value at maturity and is responsible for the swift transmission of funds to the export factor who then pays the exporter the outstanding balance.
6. If after 90 days past due date an approved invoice remains unpaid, the import factor will pay 100% of the invoice value under guarantee.

Not only is each stage designed to ensure risk-free export sales, it lets the exporter offer more attractive terms to overseas customers. Both the exporter and the customer also benefit by spending less time and money on administration and documentation.

How does Export Factoring Work?

1.Exporter receives purchase order
2.Exporter sends Importer’s information for credit approval
3.Export Factor checks the Importer’s credit worthiness through Factors Chain International partner
4.Import Factor evaluates the Importer and approves a credit limit
5.Exporter makes shipment to Importer
6.Exporter submits invoice details and supporting documents
7.Export Factor makes cash advance up to 95% of factored invoices
8.Collections are carried out by the Import Factor
9.Import Factor remits funds to Export Factor
10.Export Factor remits 20% remaining Balance to Exporter’s account less any charges a fellow member of Factors Chain International. Import factors are invited to compete for business and those with superior services are selected.

In some situations, Factors Chain International members handle their client’s business without involving another factor. This is becoming more common in the European Community where national boundaries are disappearing. However Factors Chain International members conduct their business, one thing remains certain. Their aim is to make selling in the complex world of international trade as easy for clients as dealing with local customers.

Author: Toni Nicholson, factoringcompare.com, 02/03/2010