What Is International Factoring?

International factoring is a practice wherein exporters engaged in cross-border trade sell their accounts receivables/invoices to a factoring company (factor) in exchange for an immediate advance on the invoice amount.

As the factor purchases the invoice and immediately advances up to 80-90% of the total invoice amount, the exporter doesn’t have to wait until the end of the invoice maturity period to receive payments from the buyer.

The remaining 20% balance amount, excluding the factoring fee, is paid only at the end of the maturity period once the customer pays the factor.

Under this arrangement, the exporter is freed from the responsibility of chasing the customer/importer for payments.

Instead, the factoring company becomes an intermediary and is responsible for collecting payments from the importer.

Factoring can be domestic and international, with the latter being more popular.

With a continually growing volume of international trade, comes the need for international trade finance under which international factoring companies allow entrepreneurs to conduct secure trade transactions, solve their working capital woes and thereby increase revenue significantly.

How many Factors are There in International Factoring?

There are two factors involved in the process of international factoring. However, single factoring arrangements are far more common.

1.Export Factor :

The factor located in the exporter’s country is the export factor responsible for collecting the exporter’s documents and funding their invoices, i.e., ensuring timely payments.

In most cases, the export factor is the only intermediary involved in a transaction. However, the export factor may have local partnerships, especially in countries with a high import volume.

These agencies or partners aren’t part of any formal factoring agreement; they simply assist the factor in dealing with local customs, laws, regulations, and collection practices.

2.Import Factor:

The factor situated in the importer’s country is called the import factor and is responsible for assessing the buyer’s credibility and financial worthiness. The import factor thoroughly evaluates the buyer’s payment history, chances of default, etc.

Moreover, timely collection of payments/dues from the importer is also a vital responsibility of the import factor. The import factor guarantees the payment on behalf of the importer.

Different Types of International Factoring

Listed below are the three types of international factoring:–

  • Single-factoring system

This is the most commonly used form of international factoring. Under this system, the exporter enters into a factoring agreement with the factor, stating that only one factoring firm would perform all the financing functions. The company undertakes due diligence and credit assessment of the exporter and importer, but the exporter is the initiator of the transaction.

  • Two-factor system

Under this system, four parties are involved- exporter, importer, import factor in the importer’s country, and export factor in the exporter’s country. The export factor is generally equipped to deal with the exporter’s credit profile, export performance, and financials. The import factor undertakes checks to ascertain the importer’s creditworthiness, track record of completed imports, financials etc.

  • International reverse factoring

International reverse factoring is popularly known as supply chain finance (SCF).

It is a financing arrangement where the importer/buyer initiates the factoring arrangement on behalf of the seller. It is a method of accounts payable financing that refers to a financing arrangement between the buyer and seller who engage regularly and it results in a lower cost of borrowing for the supplier or exporter as he/she leverages the importer’s credit profile to secure working capital funds.

If this arrangement appears suitable for your business make sure to check Drip Capital's supply chain finance solution here.

How does International Factoring Work?

The following steps reveal how an international factoring transaction works.

  1. The exporter receives the purchase order and sends the importer’s information to the factor for credit approval.
  2. The factor evaluates the importer’s creditworthiness and agrees to finance the deal after the exporter has shipped the goods.
  3. The buyer agrees to make a complete payment upon the maturity of the credit period, which is usually over 30/60/90 days depending on the industry.
  4. Immediately after shipping the goods from the country, the exporter sends a copy of the invoice and other shipping documents to the factor.
  5. Upon receiving the invoice, the factor verifies with the importer.
  6. As agreed, the factor advances up to 80-90% (varies from one factoring company to another) of the invoice amount upfront to the exporter.
  7. At the end of the credit period, the factor requests payment from the buyer towards the factored invoice.
  8. The buyer/importer sends the entire payment directly to the factor.
  9. The factor deducts the agreed-upon factoring fee from the payment received.
  10. The remaining amount is then transferred to the exporter.

Benefits of International Factoring

International factoring offers a wide array of benefits to the companies engaged in international trade. Some of these key benefits are listed below.

  • Consistent cash flows: International factoring helps businesses maintain smooth cash flows and ensures that there is no interruption in capital/funds to carry out day-to-day operations. Especially for small companies, who mostly face a working capital crunch, this process acts as a strong safety net, enabling them to grow the business faster.

  • Longer payment terms: It allows businesses to offer extended credit periods to their customers, thereby increasing their chances of expanding to incorporate more customers. Longer payment terms are lucrative in international trade, which allows exporting businesses to take higher volumes of orders and further expand their sales.

  • Business Expansion: Since payments are secured and guaranteed, businesses can easily take the plunge and mark their entry into different geographies due to the mitigated risks. New buyers in new markets can be approached with confidence, which can pave the way for business expansion.

  • Accumulation of information: The factoring company gathers adequate knowledge and intelligence about the exporter’s current as well as prospective international customers. Information such as their credit worthiness, financial records, market reputation, etc., is also duly verified and collected, which helps businesses choose their trade partners more wisely.

  • Less documentation: The funding process is quite simple and quick. Unlike traditional loans and advances, there are no extensive documentation requirements or procedures, which grants businesses easy and speedy access to funds.

  • Protection against bad debts: Non-recourse international factoring offers 100% protection against bad debts and insolvency of international buyers. Although in the case of recourse factoring, businesses do face the risk of bad debts, recourse factoring is far less common, and the interest rates are lucrative to balance its risk.

  • Seamless collection process: Factors possess the requisite expertise in dealing with multiple businesses in different countries across the world. As they efficiently deal with various importers in their respective local languages, cultural differences no longer hinder the collection process. Thus, international factoring ensures smooth transactions by eliminating the customs and language barriers.

International Factoring V/s Forfaiting

Forfaiting is similar to international factoring. Hence it is crucial to understand the differences between the two thoroughly.

International Factoring V/s Forfaiting

Benefits of Drip Capital’s International Factoring Solution

  • Collateral-free factoring Drip Capital offers non-recourse and non-collateral-based factoring solutions to fund sales growth with outstanding trade receivables.
  • Completely digitized processing technology-enabled credit appraisals and an automated process ensure minimal manual intervention and quick disbursements to address business exigencies.
  • Personalized services A dedicated account manager to handle all interactions and promptly resolve queries and issues.