Factoring is a transaction in which a business that has supplied goods sells its accounts receivable, or debt, at a discount for instant cash to a third party. International factoring is commonly practiced in export business by small and medium companies that want to meet their financial needs immediately in order to remain competitive in complex global markets.
Imports, Debt Collection and Commercial Risk
In cross-border factoring, the financial services for the exporter are assumed by a factoring firm once the account receivable is sold. This allows the exporter to get cash immediately to finance the operations of his business, while the import factor who buys the account receivable handles credit cover and collection in the buyer's territory. Payment collection and legal action, where necessary, is taken by the import factor. A factoring company also undertakes commercial risk and provides credit and researches the credit worthiness of the importer.
Contracts and Receivables
When the supplier sells accounts receivables to the third party, he assigns his debt in accordance with the factoring contract. The rules governing international factoring cover only receivables arising from transaction on credit terms involving goods and services provided by exporter. But letters of credit are not allowed together with cash against documents or any sales for cash. Primarily, factoring firms look for account receivable and the credit strength of the seller.
Communication and Time Limit
The language used in international factoring is English. Where information is in another language, a translation must be provided. The time limit in factoring contracts should be calendar days. If the time limit expires on a non-business day such as a weekend of public holiday, it must be extended until the next working day of the of the factor concerned. Communications in factoring must be in writing to allow to reproduced on demand. The originator of the writing must approve the communication contained in the writing by signing. In the event of an agreement which extends beyond the terms and condition of the contract of the rules supersede any other contrary conditions stipulation the conditions of the contract.
