What is dual factoring?
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.
The alternative is better, quicker and simpler. Even the FCI, which is the main architect of dual factoring, agrees.
How does it work?
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.
Can it be done confidentially?
This would be unusual and depends upon the risk appetite of the different factoring companies involved.
Dual factoring is well-established
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.
Which is better: single or dual factoring?
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. Our current experience is that our export finance product: “Open Trade Finance” is always cheaper and simpler for the parties.
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.
How can I find out more?
With a global network and global coverage, talk to us.