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.
There are four types of International Factoring:
In the two factory system, the transaction involves four parties; exporter, importer, import factor in importer’s country and export factor in exporter’s country.
With the Single Factoring 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.
When using Direct Export Factoring, only the export factor is involved. The export factor takes care of all the functions. Such a system helps in lowering the cost.
The Direct Import Factoring system, the seller transacts directly with the factor in the importer’s countries. The import factor carries all the functions.
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.