Factoring is a process of issuing international loans
by a specialized financial company through buying the importer's indebtedness
to the exporter and its encashment. Regular delays in payments and the
exporters' growing need in loans have caused rapid development of factoring
companies. The predecessors of these companies were merchants, who specialized
in merchandise factoring acting as sales representatives of manufacturers
on new markets. Financial factoring appeared in 1890 in USA due to introduction
of protective duties for textile aimed at reducing its import from Europe.
Financial factoring has been rapidly developing since World War II.
When a factoring company transfers the money to the exporter it is
granting him a loan. Sum of this loan varies from 70 to 90 percent of
the sum indicated in the invoice depending on the client's creditworthiness.
The balance of 10-30 percent is transferred to the client's blocked
account after deducting interest to be paid in accordance with the loan
agreement and the company's commission. Funds kept on this account are
used for covering possible commercial risks the company hasn't accepted
(low quality of the goods, price disputes and so forth). After the buyer
repays its debts the company liquidates the blocked account and returns
the client the balance of money.
When buying indebtedness a factoring company usually uses open cession:
it informs the buyer about transfer of the indebtedness; closed cession
is used very seldom and means that the buyer is kept uninformed. Interest
paid for factoring credit usually exceeds the official interest rate
by 2-4 percent thus ensuring high profits of factoring companies. In
spite of the relatively high costs the exporter is interested in factoring
because it is usually accompanied by enchashment, trust and other services.
Loans are extended for periods up to 120 days. Factoring agreement increases
creditworthiness of the exporter company and simplifies the procedure
of obtaining loans from banks.
The exporter company is obliged to transfer all requirements related
to realization of the goods to the factoring company. The latter buys
the indebtedness and keeps accounts of debtors and creditors. Owing
to factoring services the firm does not work with separate buyers -
it deals with the factoring company, which regularly provides the client
with account statements in exchange for its remuneration. The company
charges a commission agreed previously (0.5-2 percent of the client's
turnover) depending on the reliability of buyers, type of services,
quality of debts along with interest for loans secured by these debts.
Factoring companies carry out thorough check of the debts being purchased
from the point of view of the buyer's creditworthiness with the help
of their investigation departments and banks. Sometimes these companies
take the risks of the debts remaining unpaid including financial risks
connected with the importer's insolvency. Except for credit, accounting
and control operations factoring companies extend legal, warehouse,
information and consulting services. They have information about world
markets. Information resources are available due to close business relations
with banks, which usually initiate creation of factoring companies and
render them financial support.
Like the world economy on the whole the described sphere is affected
by concentration and centralization processes. 37 factoring companies
from 18 countries are included in the Factors Chain International Association.
The Association's headquarters are located in Amsterdam. In 1986 the
Association's members approved the Code of Mutual Factoring Customs
relating to foreign trade.
Factoring is most favorable for big exporter companies with solid clientele,
considerable delays of payments and insufficient cash resources. Factoring
services give them the following advantages: eliminating the risk of
default of payment, early realization of the debt portfolio, simplifying
the structure of the balance sheet, reducing the period of the encahsment
of the clients' requirements (by 15-20 percent on average), reducing
accounting, administrative and other expenses because factoring companies
provide high-quality service of settlement operations and so forth.
All this promotes acceleration of the capital turnover, reducing the
circulation costs, development of the exporter companies' expansion
and increasing their profits.