|The Source for California Trade Finance|
Due to the increase in world trade competition, exporters are increasingly forced to provide flexible open account terms to overseas buyers. When domestic banks are not willing to finance your export receivables, International Export Factoring may be an alternative and possibly better solution. International traders are increasingly using factoring to finance their international short-term credit sales. According to the World Factoring Yearbook there were over 60 countries reporting a domestic and export factoring industry in the year 2003. The volume of factored/discounted receivables has been growing at a substantial rate. From 1997 up to 2002 the world volume has increased by approximately 80%, and the trends would indicate continued growth in 2003.
International export factoring is the sale of your short-term foreign accounts receivable at a discount to a US based export factor company for immediate cash. The US Factor partners with a selected Overseas Factor company operating in your target market to assume the full credit risk of your overseas buyers. By selling your receivables to a factoring firm, you can receive most of your cash within days of your sale. The rest of your funds are received after the final collection from your buyer. International export factoring transactions differ from import factoring in that an additional factoring company – the Overseas Factor - is included in your financial services team.
A California based technology company – we will call Delta - had sold for years to buyers around the world on letter of credit terms. Competition from manufacturers in Asia and Europe pushed the company to offer better terms to a number of key overseas buyers. The Company evaluated various options and decided on the use of an International Export Factor to finance its sales to buyers located in Thailand, Turkey and Germany. An experienced international factor was selected with solid relationships with Import Factors in the three target countries. Delta company signed a factoring agreement with the US Export Factor which assigned the Exporter’s accounts receivable to the US Export Factor. Under the terms of the agreement the exporter Delta is covered against credit losses up to 100 percent of the approved credit.
The US Export Factor signed agreements with the Import Factor Companies located in each of the three target countries to act on the Exporter’s behalf. Under the direction of the US Export Factor, each overseas Import Factor investigated the credit standing and established credit limits for each of Delta’s local customers and some potential customers targeted by Delta. Credit lines were quickly established to enable the Exporter’s foreign customers to place orders on open account trading terms. Once authorized sales take place, the seller becomes eligible for funding. The import factors located in each target country handles the local collection and payment of the accounts receivable. The Export Factor provides the exporter with timely information collected from each Import Factor on each transaction. All stages of each sale transaction is monitored. Reports document any issues or discrepancy that effected each transaction that could impact timely payment.
Today, the international factoring operation has been favorable with overseas sales steadily increasing in the counties where factoring was activated.
Factoring Firms look primarily at the credit quality of the Account Receivables to be purchased and secondarily at the credit strength of the seller. In some instances, factors will work with start-up or young. However, they generally out companies with the following characteristics:
Advantages of Factoring in General
Advantages To Exporter
Disadvantages To Exporter
Cost of Factoring
The factor charges a "discount" or fee, usually between 2.5 and 4 percent of the invoices' value. The cost of factoring can be compared to the discount rate many corporations offer their credit customers to entice them to pay C.O.D. The average factoring commission is less than one percent of the annual sales of a client.
The following are the factors considered in determining rates:
Copyright © 2004, 2005 Ted S. Eastman. None of the contents of this article may be reproduced or republished without the express permission of the author