Factoring as a method of lending to foreign economic activity

Factoring is a type of trade and intermediary operation combined with lending to the client’s working capital, and represents the purchase by a specialized company (special department of the bank) of the exporter’s monetary claims against the importer, followed by collection.

Factoring is based on “discounting invoices”, i.e. purchase by a factoring company of customer invoices on an immediate payment basis of 70-90% the cost of the invoice (the amount of the invoice) and the payment of the rest (net of interest for the loan and commission for services) within strictly specified time periods, regardless of the receipt of proceeds from the debtors. So, advances to the exporter of funds before the due date, the factoring company lends it. At the same time, a balance of 10-30% is credited to a special blocked client’s account, the funds from which are debited by the factoring company in case of commercial risks not accepted by it. After paying the debt by the buyer, the company liquidates the blocked account and returns the balance to the client.

A variety of factoring are:

internal; international; open; closed; with recourse; without recourse.

When purchasing claims, a factoring company usually uses open factoring, i.e. notifies the buyer of the assignment of claims of exporters, and less often – closed when the debtor is not notified of participation in the transaction of the factoring company.

The recognition of a factoring company usually at 2 – 4% exceeds the official discount rate, which provides high profits to factoring companies.

Factoring is a relatively new type of financing service and is primarily intended for new small and medium-sized firms. This type of service is provided by specialized factoring companies, which are usually closely associated with banks or are their branches.

The exporting company is obliged to transfer all requirements related to the sale of goods to the factoring company, which, having bought the receivables of the customers of this company, maintains the accounts of debtors and creditors. Thanks to factoring services, the creditor company does not deal with disparate buyers, but with the aggregate debtor in the person of a factoring company that regularly sends account statements to its client, receiving remuneration for these services, which is a pre-determined commission (0.5- 2% of the client’s turnover) depending on the degree of risk (associated with the reliability of the buyer, type of service, quality of debt requirements) and interest on loans for these requirements. Factoring companies carefully check the acquired requirements in terms of the solvency of the buyer using their reference departments and banks, which, having the “on line” system, can receive information around the clock on the financial condition of their claims (obligations): received accounts, urgent accounts. In this case, factoring companies use information coding as a method of protection against competitors or abuse by third parties. The on line system allows factoring companies to provide their customers with operational information not only regarding accounting accounts, but also sales statistics. Often factoring companies take 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, warehouse, information, advisory.

To strengthen their position in the world, most factoring companies from more than 18 countries are united in the Factors Chain International association with headquarters in Amsterdam. In this regard, in order to increase the efficiency of repayment of receivables, factoring companies have the right to apply legal sanctions to a buyer who is in another country through members of this organization of that country. In order to harmonize factoring operations in 1968, members of this organization adopted the “Code of Mutual Factoring Practices” in relation to foreign trade.

So, the factoring company has the right to make claims for payment against the provision of relevant documents. If the importer is not ready to pay his account within the prescribed period, then the factoring company, however, pays it to its client in full and takes measures to receive money from the buyer.

Factoring is most beneficial for exporting firms with a solid clientele, significant deferred payments, and cash shortages. Therefore, resorting to the services of a factoring company, the exporting company receives a number of advantages:

exemption from the risk of non-payment, that is, has

100% guarantee for receiving all payments on their accounts; exemption from the need to have information about the financial condition of new buyers, since this is the case with a factoring company; early implementation of the debt claims portfolio; simplification of the balance structure; reduction of the time for collection of requirements on customers by an average of 15-20%; savings in accounting, administrative and other expenses and others.

All this helps to accelerate capital turnover, reduce handling costs, expand the expansion of expanse of exporting firms and increase their profits.

Thus, factoring is a rather expensive service for customers, however, the advantages of this new form of improving liquidity, reducing financial risk, expanding business expansion and others compensate for this shortcoming, ensuring a steady increase in customer income of a factoring company.