What is Factoring?

The factoring business evolved from an export agent transaction and originated in the British wool spinning industry in the 14th century. At that time, British wool textiles were commissioned by professional agents on a consignment basis. These agents sell goods to foreign buyers, while guaranteeing exporters commercial credit to buyers. At that time, due to the inconvenience of traffic, foreign trade business activities were relatively slow. Without a reliable agent abroad to assist, any export company will have a hard time succeeding. By the 18th century, some agents in the United States gradually mastered the management of the loan agency needed to expand their domestic market with their high efficiency and strong funds. Their status gradually evolved from the status of a previously entrusted agent to an independent economic entity-factoring. Factoring provides credit and credit management services specifically to relevant commercial enterprises under factoring contracts. After continuous development, modern factoring companies have been able to provide a package of services, including providing buyer credit investigations to sellers, 100% commercial risk guarantee for loans, accounts receivable management, and financial financing. According to reports, in 1990 the international factoring business turnover reached 13.7 billion US dollars. Not only the developed countries have factoring companies to carry out international business, but some developing countries, such as Mexico, ASEAN, Hungary, etc. also have factoring companies to provide services for their own import and export trade. ^[1]

Factoring

The factoring business evolved from an export agent transaction and originated in the British wool spinning industry in the 14th century. At that time, British wool textiles were commissioned by professional agents on a consignment basis. These agents sell goods to foreign buyers, while guaranteeing exporters commercial credit to buyers. At that time, due to the inconvenience of traffic, foreign trade business activities were relatively slow. Without a reliable agent abroad to assist, any export company will have a hard time succeeding. By the 18th century, some agents in the United States gradually mastered the management of the loan agency needed to expand their domestic market with their high efficiency and strong funds. Their status gradually evolved from the status of a previously entrusted agent to an independent economic entity-factoring. Factoring provides credit and credit management services specifically to relevant commercial enterprises under factoring contracts. After continuous development, modern factoring companies have been able to provide a package of services, including providing buyer credit investigations to sellers, 100% commercial risk guarantee for loans, accounts receivable management, and financial financing. According to reports, in 1990 the international factoring business turnover reached 13.7 billion US dollars. Not only the developed countries have factoring companies to carry out international business, but some developing countries, such as Mexico, ASEAN, Hungary, etc. also have factoring companies to provide services for their own import and export trade. ^[1]

In recent years, both domestic and international trade,

() International definition of factoring business

The Oxford Concise Dictionary, published in 1911, defines factoring business: factoring refers to economic activities that buy debt from others at a lower price and profit by recovering debt. This is a broad definition, which is relatively simple and fails to reflect the reasons for creditors' transfer of creditor's rights and the comprehensive service characteristics of factoring business.

British scholar Freddy Salinger defined factoring in his "Factoring Law and Practice" published in 1995: factoring refers to the provision of financing facilities or to save the seller from administrative troubles, Or exempt the seller from the risk of bad debts, or take off receivables for any two or all of the above purposes (except for debtors' debts due to private or family member consumption and long-term payments or installments)

In the United States, 1985's "Finance and Investment Dictionary" by Dauns Gutman defines factoring as: a company transfers its receivables to a factoring company without recourse, A form of financial service where the main creditor is not an agent. Accounts receivable were sold without recourse, which meant that the factoring agent could not recourse against the seller when the accounts were not recovered.

At the same time, the United States also has a generally accepted and relatively strict definition of factoring: factoring business refers to the factoring party and the party that sells goods or services on credit sales with a continuous agreement, the contractor The factoring party provides the following services for accounts receivable arising from the sale of goods and the provision of services:

(1) Transfer all accounts receivable on a pay-as-you-go basis;

(2) Responsible for accounting entries and other bookkeeping of accounts receivable;

(3) collection of debts due;

(4) To assume the risk of the debtor's insolvency (ie credit risk) ^[2]

In practical application, factoring business has many different operation modes. Generally (and there are special cases) can be divided into: factoring with and without recourse; explicit factoring and implicit factoring; discount factoring and maturity factoring

Factoring with recourse

Recourse factoring means

There are two main aspects of factoring fees:

1. Service commission: generally 1%-1.5% of the invoice amount for the service;

2.Importer's

International Factoring Business Process

Case: The international factoring business process itself is not complicated. The following uses the most commonly used double factoring in international factoring as an example to introduce the international factoring business process.

The exporter is Company A, a pressure cooker manufacturer in China, and the importer is Company B, a large supermarket in France.

1. After discussing with Company B, Company A intends to trade on credit (OA, 90 days).

2. Company A contacted a domestic bank (being a member of FCI), applied to it for international factoring business, and provided the bank with background information related to this credit sale transaction (trade contract). After the bank's review and approval, the two parties signed an export factoring contract, and the exporter transferred its receivables to the bank. The bank, as the export factorer, was responsible for the operation of the factoring business.

3. A domestic bank chose a French bank (also a member of FCI, and the two parties usually signed an agency factoring agreement) as the import factor, and the receivables were transferred to the French bank again. At the same time, French banks investigated the credit status of Company B and approved a certain credit line based on their credit status. Company B placed an order within this credit limit and used credit sales as payment terms.

4. After company A's goods are exported, send a full set of documents such as the original invoice, bill of lading, certificate of origin, quality inspection certificate, etc. to company B, and send a copy of the relevant documents to a domestic bank according to the requirements of a domestic bank. A domestic bank can provide financing to Company A at 80% to 95% of the face value of the export invoice according to the requirements of Company A

5. A domestic bank notifies a French bank of relevant documents through the FCI electronic data interchange system. A French bank collects the payment from Company B and delivers it to a domestic bank before the payment due date stated in the invoice, and a domestic bank pays the balance to Company A.

6. If the payment due date on the invoice reaches 90 days and Company B has not paid the payment, a French bank will pay 100% of the invoice face value (this is one of the most important functions of the factoring business we mentioned earlier). First, the factorer provides 100% credit guarantee for exporters).