50 Years Facilitating Open Account - Trade Finance

FAQ

Below are 10 of the most common questions asked by exporters. Factoring differs from country to country and different factoring companies may work slightly differently. For more specific questions please contact an FCI member in your country.

1. If I use factoring, will my customers think that my financial position is unsatisfactory?

Not at all. Factoring is now so well established that your customers will probably already be dealing with a factor, either by using one themselves or through other suppliers. This is reflected in the figures - in 2014 the total volume of business handled by factoring companies around the world was close to 2373 billion euros. 

2. How can I be sure that factoring companies will collect payments promptly? After all, the longer they are outstanding, the more interest they earn.

Factoring is a service industry and  in order to survive it must offer excellent service. If FCI members did not offer high levels of service, we would quickly lose our clients' business. And that would more than offset any gains in interest income generated through slow payment collection.On top of this, it wouldn't make financial sense: it's well known that the longer a debt is outstanding, the greater the chance that it will turn bad. We don't want to increase our risk in this way.

3. Can I use factoring if I carry on using documents on acceptance terms?

Yes you can. Many exporters are doing this. It is especially useful in markets where open account terms are not very common. Administration is simple and financing and risk coverage are not affected.

4. Letters of credit give me all I need. Why do I need factoring?

Factoring is a product designed to support your clients sales on open account terms.  Most sellers and SMEs prefer either cash up front or willing to sell against a letter of credit from the buyer’s bank.  However, most larger buyers/retailers prefer to purchase on open account terms of sale.  This is important, as if your client is not able to offer open account terms, they may lose the sale opportunity to a competitor who is able and willing to offer open account terms to the buyer.  Once the terms are agree and the receivable is created on your client’s balance sheet, the client normally has to wait for payment of the invoice by the buyer, depending on the terms of sale.  Hence, the receivable ends up becoming a dormant asset on their balance sheet, as the seller is unable to convert it to cash.  However, with the availability of factoring, you can now provide cash in exchange for the purchase of the receivable, and offer as well credit protection against the potential default of that buyer(s).  Hence, factoring has similar characteristics to letters of credit, but has the extra advantage of allowing your clients to ship on open account terms and obtain credit protection, collection service and liquidity in all one service.  

5. Will payments take longer to reach me with FCI's two factor (import and export) system?

This depends upon how the customer pays. If the payment is by cheque, then it will be quicker because our factoring agent will get local clearance and then transfer the funds to us by SWIFT. If the customer normally pays by bank transfer, it would be quicker to pay you direct. The key issue is that most customers need regular prompting for payment. Our experience is that a local company acting as our import factor can obtain payments more quickly than the supplier. Cultural, language and legislative differences can make collecting payments very dificult in foreign countries.

6. Does FCI offer factoring throughout the world?

Factoring has expanded rapidly in the last 30 years and FCI now operates in over 90 countries. There are however still a number of countries where business conditions are too risky for a factor to operate. In such cases you may be well advised to insist your customer to open letters of credit.

7. What incentive does FCI have to resolve disputes involving an invoice quickly?

If a debt is disputed the buyer and seller must find a resolution. Factors can help, but the responsibility for finding a satisfactory solution rests with the two main parties. As factors we are keen to get disputes resolved quickly because the longer it takes, bigger the chance that the buyer's financial position may deteriorate, raising the risk for the factoring agent. The Import Factor is 'on risk' once goods have been shipped and the invoice issued: this means if the buyer is to pay but doesn't, the Import Factor must do so. 

8. How quickly will you give me answers to credit line requests?

FCI has an agreed standard maximum of 10 days for a response. But this can vary from  two or three days to the 10 day limit. It varies from country to country mainly because of availability of information about buyers. 

9. The cash available under a factoring contract would be very useful, but is it more expensive than other forms of financing?

Factoring is a combination of financing and services. Because of this it is impossible to compare factoring with bank finance or credit insurance companies. The package includes not only finance - which is priced very competitively with bank finance - but also 100% credit protection on your approved customers and a full invoice collection service. Our fee is very reasonable - especially considering the cost you would incur chasing payments abroad, the cost to your business of a bad debt and the loss of potential profit if you are unable to finance growth.

10. Do you cover the risk of customer insolvency before the goods have been shipped?

We are unable to cover this risk. Our risk coverage takes effect from the day the goods are shipped, which is the point at which an invoice can be issued. Pre-shipment risk coverage is available from some insurers but it can be quite expensive. This sort of insurance is usually only used by businesses whose goods have a long production time or are highly specialised and would be difficult to re-sell to another customer if the original buyer files for bankruptcy protection prior to shipment.