What is international factoring in financial management?

In international factoring, the exporter will hire the factor who works for a factoring firm. The factor is responsible for all the cash flows. The factor is the guarantee for the import price of goods to the exporter.

Functions of international factoring are as follows −

  • Factor hire a local person to deal with the importer.
  • Factor will look into financial aspects between exporter and importer.
  • Factor will look for strong financially potential importer in the market.
  • Factor collect their requirement from importer and he will pay if importer fails.

Types of international factoring are as follows −

  • Two factor system.
  • Single factor system.
  • Direct export factoring.
  • Direct import factoring.

Some of the advantages are as follows −

  • Timely cash flow.
  • Local Language issue solved.
  • Details of foreign clients.
  • Smooth conduct of business.
  • Secure against bad debts.
  • Less paper work.
  • Reach to foreign market.
  • Increases working capital.

Process of international factoring is explained below −

Before going to process, let us know about two terms import and export factor. Import factor will check the credibility of the importer and collects payments on time. Export factor will collect the documents and make payments to the exporter

It all starts, when exporter requests for an export factor for limit approval on the importer. The export factor forward the same to the import factor of respective country. Import factor will check the credibility and finances of the exporter and if he satisfies, he will approve the request and same will be conveyed to the export factor.

Now the export factor will forward the same to the exporter, they will make an agreement. After making the agreement, the exporter will send/ships the goods to the importer by handing over necessary documents to the export factor. After getting necessary documents, the export factor will release agreed payments to the exporter and documents send to the importer and import factor.

Now, the importer will pay to import factor before the due date. After receiving the payments, the import factor will pay to export factor remaining amount. Generally, some percentage of amount will be paid when agreement is signed.

Updated on: 13-Aug-2020


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