One minute guide.
Dual factoring is the process of coordinating two factoring companies so that one of the companies can purchase an invoice from an exporter in one country and relying upon the other factoring company to collecting the amount due later from the buyer in another country.
This means that the exporter has been paid upfront, and the buyer can pay later.
Dual factoring can be contrasted with a similar arrangement but with only one factor involved. This one minute guide is about dual factoring.
Click here to read our one minute guide on single factor international factoring.
The product is simple:
The exporter contacts a local factoring company that is a member of Factors Chain International (FCI). FCI is the body that provides the system that coordinates the two factoring companies that will be involved.
Through FCI, the exporter's factor locates a factor in the buyer's country, the import factor ready to take the buyer risk.
So there are two factoring companies involved, an "export factor" and an "import factor"
The pricing is agreed across the trade (both factoring companies will charge fees).
The goods can be made.
When the goods are shipped and the invoice is issued, the export factor purchases the invoice and pays the exporter.
Later the import factor collects from the buyer, and then pays the export factor.
This arrangement is made practical by the system that FCI provides. There are some minimum requirements, most notably that both exporter and importer can locate a factoring company who will take the credit risks on the transaction parties and on each other. This can be an issue in many emerging markets.
This would be unusual and depends upon the risk appetite of the different factoring companies involved.
Dual factoring was pioneered 50 years ago and is used to process $400m+ in cross-border trades each year, but principally between companies in developed markets. Due to the types of risks involved, volumes supporting emerging market exports have been low.
There are challenges for the dual-factoring industry, most notably the rise of single-factor and trade finance solutions.
This alternative is offered by PrimaDollar. Logically PrimaDollar's solutions should offer lower costs and simpler working model for the parties, but this is subject to the ability to the providers to assess and control the risks involved.
Dual-factoring is a substantial and mature product; custom and practice changes slowly, so this will continue to handle a significant volume of cross-border trade.
With 10 offices on three continents, talk to us: click here to connect to your local office. You can also read further articles on our site:
One Minute Guide What is it? Export finance helps exporters to offer credit to their buyers. This means that they can offer "ship now, pay later" terms
One minute guide. Who is PrimaDollar? PrimaDollar is a UK-based trade finance platform working with exporters
One minute guide. What is it? Dual factoring is the process of coordinating two factoring companies so that one of the companies