50 Years Facilitating Open Account - Trade Finance

How factoring works

The factoring process

  • 1
    Exporter receives purchase order
  • 2
    Exporter sends importer’s information for credit approval
  • 3
    Export factor checks the importer’s creditworthiness through FCI partner
  • 4
    Import factor evaluates the importer and sets a credit limit
  • 5
    Exporter makes shipment to importer
  • 6
    Export factor makes cash advance up to 80% of assigned invoices
  • 7
    Collections are carried out by the import factor
  • 8
    Import factor remits funds to Export factor
  • 9
    Export factor remits the 20% remaining Balance to exporter’s account less any charges

Step 1: Exporter receives purchase order

The foreign buyer places an order with the Exporter under “open account” payment terms. The Exporter has signed an export factoring agreement with a Bank or a Factoring Company in his country and his Factoring Company is a member of FCI.

Step 2: Exporter sends importer’s information for credit approval

The Exporter sends all information about the foreign buyer to his Factoring Company (exact name, address, identification number, maximum outstanding amount, payment terms).

Step 3: Export factor checks the importer’s creditworthiness through FCI partner

The Export Factor has chosen an Import factor in the buyers’ country and has signed an Inter Factor Agreement, agreeing on mutual cooperation in the two-factor system, based on FCI’s General Rules of International Factoring and on the use of edifactoring, FCI’s messaging system. The Export Factor will send through edifactoring a credit approval request on the buyer to the Import factor

Step 4: Import factor evaluates the importer and sets a credit limit

The Import Factor will analyse the creditworthiness of the buyer in his country, based on his internal credit information or by using the services of a local credit insurance company. The Import factor will send to the Export factor his decision to approve (or refuse) the requested credit limit approval.

Step 5: Exporter makes shipment to importer

The Exporter will be advised by his Factoring Company about the Credit Approval on the buyer and will ship the goods. On the invoice the Exporter will advise the buyer that payment will have to be made on due date on the bank account of the Import factor.

Step 6: Export factor makes cash advance up to 80% of assigned invoices

The Exporter receives pre-payment (generally up to 80%) of the invoice amount from his Factoring Company, based on the Factoring agreement signed with his Factoring Company.

Step 7: Collections are carried out by the import factor

The Import Factor will send reminders to the buyer to receive payment on due date and will start collection procedures if no payment is received. The Import Factor being situated in the buyers’ country will do these collection efforts in the buyer’s language and according to commercial and legal practices from his country. If the approved buyer still hasn’t paid for reasons of insolvency on 90 days after the due date of the invoice, the Import Factor will pay the Export Factor and will continue legal collection activities with the buyer.

Step 8: Import factor remits funds to Export factor

As soon as the buyer has paid the invoice, or in case of non-payment by the buyer at 90 days after due date for reasons of insolvency, the Import factor will make a SWIFT payment to the Export Factor for the invoice.

Step 9: Export factor remits the 20% remaining Balance to exporter’s account less any charges

The Export Factor will clear the invoice in his books and will pay the remaining balance (20% if pre-payment was 80%) to his client, the Exporter.

There’s nothing complex about factoring. It’s simply a package of services designed to make international trading easier.

 

Typical services include:

  • investigating the creditworthiness of buyers
  • taking on credit risk
  • 100% protection against write-offs
  • collection and management of receivables
  • provision of finance through immediate cash advances against outstanding receivables

 

The international factoring service offered by FCI members involves six stages:

  1. The exporter signs a factoring contract with the Export Factor. The exporter then assigns all receivables approved to the Export Factor. The export factor is now responsible for all aspects of the factoring operation.
  2. The Export Factor selects a counter party, the so-called Import Factor, usually in the country to which the goods are to be shipped. These receivables are then assigned to the Import Factor.
  3. At the same time, the Import Factor investigates the credit standing of the buyer 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 and makes sure the funds are swiftly forwarded to the Export Factor who in turn pays the exporter the rest of the money due.
  6. If, after 90 days past the due date, an approved invoice remains unpaid, the Import Factor will pay 100% of the invoice value under guarantee.

 

 

Each stage of this process ensures risk-free export sales – and it allows exporters to offer more attractive terms to overseas buyers. Both the exporter and the buyer also benefit by spending less time and money on administration and documentation.

 

Export factoring allows the exporter not only to ship risk-free on open account terms to a buyer abroad, but also to outsource the collection of the receivables through an Import Factor in the buyer’s country. The exporter works with a top quality Export Factor who contracts with a top quality Import Factor. Both factors are members of FCI. This protects the interests of the exporter. As well as the credit protection provided by the Import Factor, the money due to the exporter is collected by the Import Factor in the buyer’s own country, in local currency, by a reputable local institution that is recognised by the buyer.

 

The aim of FCI is to make international sales as easy as dealing with local customers.