International factoring is the process of purchasing an invoice from an exporter in one country and collecting it later from his buyer/importer located in another country. The exporter receives payment up front from the factor by way of a discount against the invoice and the source of repayment comes from the proceeds paid by the buyer/importer at the due date of the invoice.
There are two versions of international factoring:
- single export factor and
- dual two-factor: whereby the export factor uses the services of a correspondent import factor in the country of the buyer to guarantee, manage disputes and collect the payment from the buyer.
Factoring may include a set of trade related services such as:
- Protection against bad debts
- Collection of receivables
- Receivables ledger administration
International factoring started in the 1960s, with European countries as the pioneers.
Selling in an international marketplace is a challenge for many companies. Different currency systems, legislation and languages are still barriers to international trade even though we can place orders across the globe within seconds.
One of the greatest problems is the growing insistence by importers that trade is conducted on open account terms. This often means that payment is received many weeks or even months after delivery. Offering buyers credit in this way can cause cash flow problems for exporters. The situation can become worse if importers delay payments - or make no payment at all because of their own financial problems.
International factoring two-factor system provides a simple solution to these problems, regardless of whether the exporter is a small organisation or a major corporation. The role of the factor is to collect money owed to exporters by approaching buyers in their own country, in their own language and in the locally accepted manner. A factor can also provide the seller with 100% protection in the case of the buyer’s inability to pay.
International factoring has proved very attractive to exporters. It is now seen as an excellent alternative to other forms of trade finance and the traditional letter of credit is gradually being replaced by open account trade finance services such as international factoring. This means the need for international factoring will continue to grow, not only in industrialised parts of the world but also in developing countries. In the future, the challenge for factoring companies will be to maintain their flexibility so that they can react quickly to changing market circumstances