International Factoring is used by exporters who sell on open account or documents against acceptance terms. International factoring eases much of the credit and collection burden created by international sales. By outsourcing the credit function, exporters can convert the high fixed cost of operating an international credit department into a variable expense.
Commissions paid to the factor are based on sales volume so costs fluctuate with actual sales, lowering operating costs during slow sales periods. In addition to relieving exporters of the time-consuming administrative burden of approving credit and collecting export sales, international factoring lets exporters safely offer their foreign customers competitive open account terms. Financing is provided by means of advances against outstanding accounts receivable.
In summary, international factoring provides the following benefits to exporters:
- Increased sales in foreign markets by offering competitive terms of sale
- Protection against credit losses on foreign customers
- Accelerated cash flow through faster collections
- Lower costs than the aggregate charges for L/C transactions
- Liquidity to boost working capital
- Enhanced borrowing potential and an opportunity to make use of supplier discounts
Obviously, there are also advantages for importers. Until quite recently the Letter of Credit (L/C) was the most universally accepted method to control international trade, in the sense of assuring that the exporter would ship in accordance with the sales contract or the purchase order and that the importer would honor his financial obligations. Yet, while this method (or 'term of sale') had considerable merit when goods were moving slowly and at irregular intervals along shipping lanes, the L/C places a financial burden on importers, which in most cases is no longer tolerated.
In summary, international factoring provides the following benefits to importers:
- Purchase on convenient 'open account' terms
- No need to open L/C's
- Expanded purchasing power without blocking existing lines of credit
- Orders can be placed swiftly without incurring delays, L/C opening charges, negotiation charges, etc.