From Supply Chain Management Encyclopedia
Russian: Международный факторинг
International factoring is a means of financing international receivable accounts, by which a firm can ask a factoring company (factor) to advance funds on a receivable account. However, there is no universal definition of factoring. In different parts of the world factoring has been defined in different ways. The conference of International Institute for Unification of Private Law (UNIDROIT) on factoring held in May 1988 defines that factoring is an arrangement between a factor and his client which includes at least two of the services as
- (a) finance
- (b) maintenance of accounts,
- (c) collection of debts and
- (d) protection against credit risks.
One could also define the factoring as a purchase of receivables by factor from its client and collect it during the maturity from the debtor. Usually the factor pays the client about 80% of the value of the receivable and remaining is paid by collecting from the debtor after the deduction of charges. There is Domestic Factoring and International Factoring.
International factoring is used when the Seller and the Buyer are located in different countries. One solution for the factoring scheme (see below) is two-factor system according to which responsibilities are divided between two factoring companies. Export-Factor finances the Seller and provides accounts receivable administration. Import-Factor provides credit cover to the Export-Factor and collects outstanding invoices. Such scheme of cooperation is very comfortable and effective in cases when there are significant economic, legal and especially linguistic differences between the countries of the Seller and the Buyer.
Scheme of InternationalPayments Using Two Factor Arrangements
- . Importer issues an order to purchase goods from Exporter.
- . Exporter (using proforma invoice) requests Export-Factor about a limit for an acceptable cost of Importer’s order.
- . Export-Factor, in his turn, reconciles the said Importer’s order with Import-Factor.
- . Import-Factor probes Importer’s financial/credit history.
- . In the case of positive outputs resulted from probing Importer’s financial/credit history, Import-Factor approves the said deal and issues the corresponding approval to Export-Factor.
- . The factoring agreement between Export-Factor and Exporter comes into effect.
- . Exporter delivers the said goods to Importer and, along with other necessary documents, issues the invoice in accordance with the international sale contract.
- . Exporter transfers the deal’s documentation (international sale contract with open account method of payment) to Export-Factor.
- . Export-Factor transfers the funds stipulated in the said factoring agreement () to Exporter (usually not more than 80- 90% of the full cost of the international sale contract concluded between Exporter and Importer).
- . Export-Factor transfers the said deal’s documentation to Importer and Import-Factor.
- . By maturing (in accordance with the said invoice issued by Exporter) Importer makes the payment in favor of Import-Factor.
- . Import-Factor, in his turn, transfers the funds stipulated to Export-Factor.
- . Export-Factor transfers the funds stipulated to Exporter, effecting the settlement according the said Exporter’s invoice taking into account the payment in advance transferred before .
- ↑ http://www.unidroit.org/about-unidroit/overview
- ↑ Mizan, A. N. K. Factoring: a Better Alternative of International Trade Payment Methods // ASA University Review, Vol. 5 No. 2, July–December, 2011 - http://www.asaub.edu.bd/data/asaubreview/v5n2sl18.pdf
- ↑ Introduction to International Factoring - http://wenku.baidu.com/view/8467f9f09e31433239689318.html