International Factoring
FACTORING is the purchase by a factor of a seller’s accounts receivable. The factor buys thepaper (account) from the seller, usually for a discount or a fee. It then collects the paper from the buyer. Since factoring is a short-term finance, it does not normally pay interest on the paper it purchases. Instead it makes its profit from the discount charged to the seller for the purchase of the paper and the service charges of collecting and handling the accounts.It might be argued that factoring is the oldest form of finance since trading on credit has always been a part of the business world. It has been known since the thirteenth century, but it was always limited to large merchants. It has now grown in importance, especially since the World War II.
International factoring is the purchase of domestic accounts receivable of an exporter by a factor based in another country. Usually the factor is located in the same geographical area as the buyer on the credit paper, but ever more transnational factors enter the international market. The factoring contract usually has several elements. The exporter usually finds a suitable foreign factor with the help of its local exporter, who will act as an intermediary between the exporter and the foreign factor. The foreign factor agrees to purchase the domestic accounts at a discount and agrees to assume the ownership and the administration of the accounts and the collection risks.
Domestic U.S. factoring for exporters has also grown in importance, with some U.S. factoring companies specializing in helping exporters access international markets. These companies not only purchase the paper from domestic exporters but also assume the collection risks from foreign importers. These companies are engaged in cross-border factoring, and they assume the risk of collecting the debt abroad, often handling all the administrative aspects of the transaction.
International factoring is growing in importance both in the U.S. and world wide. This type of financing is becoming more common as exporters look for ways to access international markets. International factoring offers a number of benefits including reduced risk, cost savings, and more efficient management of foreign accounts receivable, as well as easier access to growth markets. By transferring the collection risk and responsibility to a factor, the exporter has been freed up to focus on its core activities and sell more products to its overseas customers.
