Domestic and Export Factoring

Full Factoring: This is the most comprehensive form of factoring combining the features of almost all the factoring services specially those of non-recourse and advance factoring. It is known as old line factoring. Full factoring provides the entire spectrum of services namely collection, credit protection, sales ledger administration and short term finance.

The name of the factor is not disclosed in the invoice in undisclosed factoring although the factor maintains the sales ledger of the supplier manufacturer. The entire realization of the business transactions is done in the name of the supplier company but all control remains with the factor. He also provides short term finance against sales invoices.

In the domestic factoring, the three parties involved namely customers (buyer), client (seller supplier) and factor(financial intermediary) are domiciled in the same country. The mechanics pf such factoring deal is outlined in the preceding discussion reacting to different types of factoring. The process of export factoring is almost similar to domestic factoring except in respect of the parties involved. While in domestic factoring three parties are involved, there are usually four parties to a cross border factoring transaction. They are: (1) exporter (client), (2) importer (customer), (3) export factor and (4) import factor. Since two factors are involved in the deal, international factoring is also called two-factor system of factoring.

The two factor system results in two separate but inter-linked agreements: (1) between the exporter (client) and the export factor and (2) between the export factor and the import factor. Usually, the export and the import factors belong to a formal chain of factors with well defined rules governing the conduct of business. Otherwise, they evolve an ad hoc relationship to conduct specific transactions. The import factor a link between export factor and the importer and serves to solve the international barriers like language problems, legal formalities and so on. He also underwrites customer trade credit risk, collects receivables and transfers funds to the export factor in the currency of the invoice. The flow of documents and information between the parties involved in cross border factoring takes the following shape:

1. The exporter informs the export factor about the export of goods to a particular import client domiciled in a specified country. The goods are sold on open credit
2. The export factor writes to import factor (domiciled in the country of the importer) enquiring about the credit worthiness, reputation etc of the importer.
3. On getting satisfactory information on the import factor, the exporter delivers the goods to the importer and the relevant invoices, bills of lading and other supporting documents are delivered to the export factor. The export receivables on a non recourse basis are factored.
4. The export factor farms/contracts out the work of credit checking sales ledgering ad collection to the import factor with respect to the customers located in the country of imports.
5. The import factor collects the payment from the importer (customer) and effects payment to the export factor on assignment/maturity/ collection as per the terms of assignment in the currency of the invoice.
6. Finally, the export factor makes payment to the exporter up on assignment or maturity or collection depending upon the type of factoring arrangement between them.

International factoring provides a non-course factoring deal. The clients (exporters) have cent percent protection against bad debt loss on credit approved sales. The factors take requisite assistance and avail facilities provided in the exporting country for export promotion. They handle exporter’s overseas sales on credit terms. In fact, the factor becomes the sole debtor to the exporter once documentation is complete and goods have been shipped.