In 2019, “Made in Germany” is still in demand worldwide. Germany exported goods and services of more than EUR 1.2 Trillion across the globe, growing at a similar rate to the growth of export factoring which currently sits at EUR 68.1 Billion per annum. Import factoring increased similarly by 5.5% to EUR 3.7 Billion per annum.
What is Factoring?
Factoring is a financial service in which the business entity sells its bill receivables to a third-party at a discounted rate. Factoring involves the selling of all the accounts receivable to an outside agency. Such an agency is called a factor.
Factors are financial companies which pay cash against the credit sales of the client and obtain the right to receive future payments on those invoices from the debtors of the client.
The exporters allot all receivables approved to the Export Factor. The Export Factor is responsible for all aspects of the factoring operation. The Export Factor selects counterparty, called the Import Factor, generally in the country where the goods will be shipped.
Various benefits of factoring receivables:-
• Professional collection service
• Dramatic extension of capital
• Elimination of bad debt
• Advantageous in volume and early payment discounts
• No personal guarantees required
• Increased sales in foreign markets
• Protection against credit losses on foreign customers
• Better cash flow through faster collections
• A boost in working capital
• Lower costs than the average charges for Letter of Credit or LC transactions
Types of factoring
Factor companies across the globe offer various types of factoring services depending upon the requirement of the client. Types of factoring
Domestic and International Factoring
Domestic factoring is undertaken for the financing of receivables within the country and involves only one factor. Factoring for cross-border sales transactions is called international factoring. It is also called export or import factoring depending on the location of the factoring customer.
With-Recourse and Without-Recourse or Non-Recourse Factoring
A factoring arrangement can enter with recourse or without recourse to the seller. In the case of with-recourse factoring, the factor has legal recourse to the seller, if the debtor fails to pay on maturity. However, in without-recourse factoring, the factor does not have recourse to the seller in case of default and bears the credit risk in case of the buyer’s inability to pay.
Disclosed and Undisclosed Factoring
Under disclosed factoring, the debtor is informed of the assignment of debts to the factor and is accordingly required to cooperate for future transactions and collections. On the other hand, under undisclosed factoring, the debtor is not informed of the agreement entered into between the seller and the factor.
One of the exceptional advantages of export and import factoring is that it allows exporters to trade on open account terms without risk. Factoring helps in the growth and expansion of the business across the globe hassle free.