The international business operations involve a number of risks linked, among others, collections management and possible insolvency of the foreign customer. Faced with this, international factoring represents a mechanism for managing these financial risks, allowing coverage of the risk of insolvency of debtors. It also includes administrative services for the collection of credits derived from export transactions with installment payments, which have been transferred to the factoring entity (bank).
In addition, international factoring offers an important advantage to the exporter: the possibility of anticipating the credits that have yielded and reduce their level of bank indebtedness. This is a short-term financing facility to obtain liquidity immediately, with the advance of a number of bills pending collection.
Depending on the contracted services, you can distinguish between factoring without recourse and factor with recourse. In the first case, the financial institution assumes the risk of insolvency of the importer, both in management and in breach, while in factoring with recourse is the exporter which is responsible for the risk of insolvency of the foreign client.
There is in turn factoring with or without notification. That is when once a right of the collection has been assigned, the importer is notified of the assignment of the credit. In the first case, the importer is obligated with the financial institution to make the payment according to the terms agreed in the right of collection. In the case of factoring without notification, the importer will pay the exporter who will be the one who will then pay the financial institution the amount of the assigned loan.
One outstanding advantage: advance of funds
By means of the factoring agreement, if the globality clause applies, the exporter undertakes to submit all export invoices, without carrying out a selective transfer of commercial credits with greater risk. For its part, the financial institution undertakes to provide the agreed services, although reserves the right to reject credits whose intrinsic risk is unacceptable.
The contract will include the percentage of the amount of each invoice that can be anticipated, as well as the limits of the possible partial payments anticipated and the applicable interest rate.
The exporter will send the documents representative of the operations carried out (invoices) to the financial institution. This will then be paid by the percentage that can anticipate the nominal amount of credits transferred, net of commissions (their value depends on the services contracted) and interest applied for the prepayment.
It is sometimes possible for the exporter’s financial institution to rely on other financial institutions to secure and manage the collection of assigned commercial credits, known as correspondents, and located in the importer’s country.