Factoring as a method of crediting foreign economic activity
Factoring is a type of trade and intermediary operation combined with lending to the client’s working capital, and is a purchase by a specialized company (special department of the bank) of the exporter’s monetary claims against the importer, followed by their collection.
At the heart of factoring is the “discounting of invoices”, i.e. purchase by the factoring company of customer invoices on the conditions of immediate payment of 70-90% of the cost of the invoiced deliveries (amount of invoices) and payment of the rest (minus interest for the loan and commission for services) in strictly stipulated terms, regardless of receipt of receipts from debtors. Thus, advancing the exporter’s funds before the deadline for claims, the factoring company lends it. At the same time, the balance of 10-30% is credited to a special blocked account of the client, the funds from which are written off by the factoring company in case of occurrence of commercial risks that are not taken by it. After paying the debt by the buyer, the company liquidates the blocked account and returns the balance to the customer.
Varieties of factoring are: internal; international; open; closed; with the right of recourse; without the right of recourse.
When buying requirements, the factoring company usually applies open factoring, i.e. notifies the buyer about the cession of exporters’ claims, and less often – closed, when the debtor is not notified of participation in the transaction of the factoring company.
The reward of a factoring company is usually 2-4% higher than the official discount rate, which ensures high profits for factoring companies.
Factoring is a relatively new type of financing services and is primarily targeted at new small and medium-sized firms. This type of services is provided by specialized factoring companies, which are usually closely connected with banks or are their branches.
The exporting company is obliged to transfer all the requirements related to the sale of goods to the factoring company, which, having purchased the accounts receivable of the clients of this firm, keeps accounts of debtors and creditors. Due to factoring services, the creditor company deals not with isolated buyers but with the aggregate debtor in the face of a factoring company that regularly sends account statements to its client, receiving a fee for these services, which makes up a predetermined commission (0.5-2% of the amount of the client’s turnover) depending on the degree of risks (related to the reliability of the buyer, the type of services, the quality of the debt claims) and the interest on loans for these requirements. Factoring companies carefully check the acquired requirements from the point of view of the buyer’s solvency with the help of their reference departments and banks, which, having an on-line system, can receive information about the financial status of their requirements (obligations): receive bills, urgent accounts. In this case, factoring companies use information coding as a method of protection from competitors or abuse by third parties. The “on line” system allows factoring companies to provide their clients with operational information not only regarding accounting accounts, but also sales statistics. Often, factoring companies take on financial risks, including risks associated with the insolvency of the importer (“delkredere”). In addition to the above operations, factoring companies offer a wide range of additional services: legal, warehousing, information, advisory.
To strengthen its position in the world, most factoring companies from more than 18 countries are united in the association “Factors Chain International” with its head office in Amsterdam. In this regard, to enhance the efficiency of repayment of receivables, factoring companies have the right to apply legal sanctions to a buyer located in another country through members of this organization of the country. To harmonize factoring operations in 1968, the members of this organization adopted the “Code of Mutual Factoring Customs” applied to foreign trade.
So, the factoring company has the right to make demands for payment against the provision of relevant documents. If the importer is not ready to pay his account within the specified period, the factoring company nevertheless pays it to his client completely and takes measures to receive money from the buyer.
Factoring is most advantageous for exporting firms that have a solid clientele, significant deferred payments and a lack of cash. Therefore, resorting to the services of a factoring company, the exporting firm obtains a number of advantages: exemption from the risk of non-payment, that is, it has a 100% guarantee to receive all payments on its accounts; exemption from the need to have information about the financial condition of new customers, as this is done by a factoring company; advance realization of the debt portfolio; simplification of the balance structure; reduction of the time for collection of claims on customers by an average of 15-20%; saving on accounting, administrative and other expenses and others.
All this contributes to accelerating the turnover of capital, reducing the costs of circulation, expanding the expansion of exporters’ firms and increasing their profits.
Thus, factoring is a rather expensive service for clients, but the advantages of this new form of improving liquidity, reducing financial risk, expanding business expansion and others, compensate for this shortcoming, ensuring a steady growth in the income of customers of a factoring company.