What is international factoring?
International factoring is the process of purchasing an invoice from an exporter in one country and collecting it later from his buyer who is in another country.
This means that the exporter has been paid upfront, and the buyer can pay later.
There are two versions: single factor and dual factor.
Dual factoring can be contrasted with a similar arrangement but with only one factor involved. This one minute guide is about factoring where only one factor is involved – which is what PrimaDollar does. This is better, quicker and simpler. Even the FCI, which is the main architect of dual factoring, agrees.
Can it be done confidentially?
Many exporters would not like their buyer to know that they are using factoring finance. Although this is not true, some exporters are concerned that using a factoring service can be considered a sign of financial weakness.
International factoring, however, cannot be done safely without contacting the buyer. There are a couple of reasons:
- The point of the arrangement is usually to take advantage of the fact that the buyer is a better credit than the exporter. So this means that the buyer should pay the finance company and not the exporter, or exporter’s credit is not removed from the transaction.
- In cross-border trade, there is more fraud risk – where buyers are impersonated, trades are double-financed or payments go missing.
These are not just commercial considerations, regulators also want to be sure that the parties involved in the transaction are as intended and disclosed.
How does it work?
Factoring programs can be “buyer-led” or can be “exporter-led”.
PrimaDollar only operates on the buyer-led model. This means that if you wish to factory your invoice with PrimaDollar, you will need to introduce us to your buyer as the first step so that we can arrange financing for the buyer that can then be accessed by you.
The product is simple:
- Get a credit limit on the buyer – see previous point about introducing us to your buyer to achieve this.
- Agree the pricing.
- Make the goods.
- At shipment, sell the invoice and get paid.
There are many detailed questions around how a trade works. These include the incoterm to apply, the timing, how the goods will move and be released and when the payment will be made by the buyer.
This is also why it is more accurate to describe this product as a trade finance product rather than a pure factoring product – and where many of the differences with domestic factoring products emerge.
Are there different types of international factoring?
There are two main types:
- Buyer-verified transactions
- Buyer-confirmed transaction
The difference between these two types of trade finance relates to the allocation of risks between the buyer and the exporter, and therefore also affect the risks which the trade financier is taking.
Which is better – verified or confirmed?
The most efficient and simplest transactions are buyer-verified.
In this situation, the buyer agrees to pay the invoice to the financier but keeping any rights against the exporter if issues arise. This is the lowest cost and easiest kind of transaction to arrange and is no different to how buyers work when using letter of credit.
If the buyer simply confirms the transaction without verification, then this is a more complicated situation. A weaker confirmation from the buyer leaves the financier with a remaining risk on the exporter for recovery if problems arise. The likelihood of this happening can be difficult for the financier to assess.
Buyer-verified factoring is therefore lower cost, with higher advance rates, and is simpler to arrange. Transactions which are only buyer-confirmed are more expensive, have lower advance rates and may often involve unacceptable risks for the financier, who may then decline the credit.
Buyer-led programs, such as those arranged by PrimaDollar, are always verified.
How can I find out more?
With a global network and global coverage, talk to us.