Import Factoring


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TEFO Home About TEFO Management Team Products & Services Trade Glossary Import Finance Tutorial Export Finance Tutorial	Import Factoring Introduction In North America, the standard practice of the largest corprations and government agencies is to require that all their vendors provide extended payment terms of sale. In most cases there is little room for negotiation. Take it or leave it. If you want the business you are forced to finance your corporate and government buyer for 30 days, 60 days and longer periods of time. Smaller business vendors – known as SMEs - are particularly effected because they are less likely to obtain extended credit terms from their own suppliers. The timing differences between cash outflow and cash intake is the basis of cash flow problems endemic in the SME business community. The cash flow “crunch” can be seriously exacerbated during economic downturns.when buyers commonly “stretch” or delay paying their payables. A good solution for SMEs to this inevitable cashflow dilemma is the use of a financial tool called factoring. The tool can be particularly effective for international traders that import large shipments of goods. When an importer sells product under extended short-term credit terms to a substantial creditworthy buyer factoring becomes a real option. The extended credit term sale creates an account receivable that may be sold to a Factor at a discount for immediate cash. The market for factoring in the United States has been growing over the years. According to the Commercial Finance Association domestic factoring reached over $87 billion in the year 2000, making factoring the country’s single largest method of funding credit sales. Example Webb Tile Supply is a rapidly growing importer and distributor of mosaic tile. With the Spring remodeling season arriving, the company received orders from 2 major buyers totaling $724,000 in sales. Each buyer wanted 60-day open account terms. Webb Tile Company’s supplier in Sri Lanka required a Letter of Credit for the tile order in the amount of $428,000 in order to get pre-export financing from their local bank. As a result of rapid growth, Webb Tile Supply had reached its credit limit under its bank line of credit. The company did not have enough working capital to open the Letter of Credit and handle the extended credit terms of 60 days for each of the new buyers. Webb Tile Supply decided that Factoring would provide quick access to the required capital and selected an experienced Import Trade Factor. After 5 days of intensive due diligence, the factor agreed to the deal. The transaction proceeded as follows: Webb Tile Supply asked its bank to open a sight draft Letter of Credit (L/C) in the amount of $428,000 in favor of the Sri Lanka Supplier. The Factor provided its credit strength to guarantee the L/C credit to the bank. The bank issued its letter of credit in favor of the Supplier in Sri Lanka. The Supplier in Sri Lanka shipped the tile product and made out the shipping documents to the account of the Factor The Bank received the documents from the Supplier and negotiated the Letter of Credit paying off the Supplier. The Factor paid off the bank. The cargo ship with the container of tile arrived at Oakland Sea Terminal in California The factor advanced funds to Webb Tile Supply to pay the freight bills and import duties. Webb Tile Supply arranged with a Customs House Broker for the importation of the tiles. The tiles were delivered to Webb Tile Supply’s warehouse and held there, subject to the Factor’s control. Webb Tile Supply arranged for the delivery of the tile to the two new customers. Upon delivery and acceptance, Webb Tile Supply issued an invoice to each Buyer and sent a copy to the Factor The Factor advanced 80% of the invoice amounts to Webb holding back a 20% Reserve. The factor held a general lien and trust receipts covering the purchased goods from the time the bills of lading was released to the Webb Tile Supply until the goods were sold. The new customers made their payments directly to the Factor’s lock box. Upon receipt of the payment Factor remitted to Webb the difference (reserve) between the collected amount and the advance, less discount fee. Factoring Services Check on the credit history and reports of domestic buyers. Advise on the appropriate terms of sale for buyers. Arrange for open credit to be extended to the domestic buyer. Factor commonly assumes the full credit risk for the purchased accounts. Prerequisites Companies with a history of operations. Management with a proven track record. History of selling to other creditworthy businesses. The product or service must have been delivered and accepted. The factor must be able to obtain a priority collateral position on the financed receivables. The buyer may not have any rights to return or offset payment on the product or service. General Advantages of Factoring Factors look first at the credit worthiness of the Account Receivables to be purchased, and second at the credit history of the applicant. Some Factors will work with start-up or young companies. Factoring injects working capital and improves cash flow. Factoring can eliminate bad debts. Reduces operating expenses. Strengthens balance sheet and enhances borrowing potential. Improves management information. Provides a quick, alternative source of financing. Provides supplemental financing beyond what a current commercial lender may be able or willing to provide. Funds business growth/expansion without increased bank debt or selling equity. Enables company to increases sales and profitability. Preserves company’s existing lender arrangements. Provides professional collection and credit checking support. Decreases the business costs associated with the collection process. Provides complete and detailed reports about accounts receivable portfolio. Importer Advantages The importer can offer open account short-term credit terms to their buyers that may not be otherwise be available. Avoids the costs of Letters of Credits including opening and negotiation charges, etc. Increases purchasing power without utilizing existing bank lines of credit. Can make quicker, smaller, “Just-in-Time” purchases Application Process Most factors will accept an online application. Factor reviews the application. If approved, factor will forward legal documentation for approval and signature. Company provides a listing of accounts to be factored. Factor conducts due diligence which should take less than 10 working days. Review of company background Searches for UCC liens, tax liens, judgment liens, etc. Evaluates credit of companies to be factored When the review is satisfactory and complete, funding can begin. Cost of Factoring The factor charges a discount or commission, usually between 2.5 and 4 percent of the invoice 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: Total dollar amount of factored invoices. Average invoice dollar amount. Invoice turn (anticipated average) and Invoice turn (actual). Credit worthiness of customer base. Length of factoring contract. Minimum commitment of invoices to be factored. Advance percentage (contractual) and Advance percentage (actual). Reserve percentage (contractual) and Reserve percentage (actual). Ratio of factored to non-factored invoices upon which we have a first lien. Existence or non-existence of collateral in addition to accounts receivable. Financial condition of client, and guarantor(s). Historical dilution (non-payment of invoices in the amount billed due to claims, disputes, adjustments, etc.) and Actual dilution. Other Related Sites http://www.globalfinanceonline.com/invoice-discounting-factoring-information-intro.html http://www.globalconsultants-egypt.com/tradefinance.html http://www.factors.com/html/articles/factoring_inter_3.html http://www.jd-purchase-order.com/pricing.asp http://www.ucdc.com/html/plans.html		We take your privacy and the security of your company information very seriously. Please view our privacy and security policy.
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