Procedure of International Factoring Transaction

[nesarul]

Deal All,
pls provide some light on international factoring transaction
thanks
nesar

[shahriar]

Dear nesar,

Let me try to help you. Factoring is considered to be the most popular method of receivable financing. Receivable financing is something when you sell your debt to others to increase liquidity and as a result you need not to wait till maturity of a bill. There are mainly three parties in factoring. Exporter, the financing company called factor and the importer. After exporting the beneficiary submits the invoice to the factor that generally pays a part of the invoice value in advance and the rest on realization of the value from the importer. Factor will charge for this of course.

There are different kinds of factoring. I can name some of them. Like direct factoring, two factor system etc.

Regd

shahriar

[nesarul]

Dear Shahriar,
then what is forfeiting and what is the difference between two.
thanks
nesar

[Mehdi]

Factoring is the discounting of short-term receivables (up to 180 days). Forfaiting is a method of trade financing that allows the exporter to sell medium-term receivables (180 days to 7 years) to the forfaiter at a discount in exchange for cash. Hence the difference between these tow ones is based on time period.

Hope this is of help to you.

Regards.............Mehdi

[shahriar]

Dear mehdi,

Thanks for helping me. Good brief answer. Just to add –


Forfeiting is a mechanism of financing exports where the forfeiter discounts export receivables evidenced by bills of exchanges or promissory notes without recourse. These are generally medium to long-term.

Factoring and forfeiting has very thin differences –

As mentioned by mehdi, term is an important difference. Besides factoring may be with or without recourse while forfeiting is always without recourse. For factoring no negotiable instrument is required which is not the case with forfeiting. In factoring the factor takes over the entire book deft while forfeiting is something like transaction based; you purchase a bill of exchange. Since forfeiting involves a negotiable instrument, it can be transferred further which is not the case with factoring. Rather factoring is some kind of service to collect the debt for the client.

Hope that answer the question

Regds

Shahriar

[Md.zakir Hossen]

Dear Nesar
I want to share about the process of Factoring to you today.About forfeiting I will discuss it next day.
International Factoring

International Factoring is an agreement between an exporter and a factor whereby the factor purchase the trade debts from the exporter and provided the services such as finance, maintenance of sales ledger, collection of debts, protection against credit risk.

USA and Europe are fully matured market for factoring; Asia and the Pacific areas have shown the most dramatic growth. But Latin America, Central Europe, Middle East and South Asia are at the beginning of factoring boom.


Various from of international factoring are in vogue depending upon the exporter’s needs and cost bearing capacity, and security to the factors.These forms are:

Single factoring system
Two factoring system
Direct Export Factoring system
Direct Import Factoring system
Back to Back Factoring.

There are 02 association of factoring companies:01.International Factor Group(IFG) and FCI(Factor Chain International)

When the international factoring is carried out by the members of FCI (Factor Chain International)


When the international factoring is carried out by the members of FCI, the services involve a four or five stage operation.

Stage no 01: The exporter signs a factoring agreement assigning all trade receivables to an export factor.

Stage no 02:The export factor chooses an FCI correspondent to serve as an import factor in the country where goods are to be shipped.The receivables are then reassigned to the import factor.



Stage no.03: At the same time, the import factor investigates the credit standing of the buyer and establishes lines of credit. This allows the buyers to place an order on open account terms without opening letters of credit.

Stage no.04: The export factor will now advance up to 80% of the invoice value to the exporter.

Stage no.05: Once the sale has taken place, the import factor collects the full invoice value and is responsible for the SWIFT transmission of funds to the export factor who then pays the outstanding balance to the exporter.





Finally Factoring and Forfeiting are the two derivative products that emerge in the market as a replace of Letter of Credit.

Exporter and importer like this two product because
Less costly
Less hassle
To avoid discrepancy, which you know that 80% of the documents send back because of discrepancy.

So for the lover of L/C
Frustrating…………………..

[Mehdi]

Thanks Shahriar for adding something relevant to the issue raised by Nesar.

Regards............Mehdi

[nesarul]

Dear Zakir Bhai,
thanks for nice explanation and awaiting for similar explanation regarding forfeiting.
thanks
nesar

[Md.zakir Hossen]

Welcome Nesar,
Iwill also highlight on Forfaiting.just now I am very bussy.
Keep in touch with the topic
zakir