Factoring in Export and Import: A Simple Guide with the Two-Factor Method and Key Players in India

Factoring in Export and Import: A Simple Guide with the Two-Factor Method and Key Players in India:

Factoring is a vital financial tool for exporters and importers, allowing businesses to sell unpaid invoices to a factor for immediate cash, essential in international trade with long payment terms. This guide explains factoring in simple terms, focusing on the two-factor method as outlined by Factors Chain International (FCI), the role of import factors in assessments, how factors secure advances, and key factoring companies in India.

• What is Factoring in Export and Import?

  • Factoring enables businesses to sell invoices (money owed by customers) to a factor (e.g., a bank or firm like SBI Global Factors or RXIL) for quick cash, minus a fee, critical in international trade where payments take 60–120 days due to shipping and customs delays.

  • Example: An Indian spice exporter sells a $50,000 invoice from a U.S. supermarket to a factor, receiving $45,000 upfront to fund more exports, while the factor collects the full amount later.

• How Does Factoring Work in Export-Import with the Two-Factor Method?

  • Step 1: Issuing the Invoice: You export goods (e.g., $50,000 of spices to a U.S. supermarket) or import goods (e.g., $100,000 of garments from Bangladesh), with payment due in 60–120 days.

  • Step 2: Contacting an Export Factor: You approach an export factor in your country (e.g., RXIL in India) with the invoice and trade documents like the bill of lading.

  • Step 3: Two-Factor Assessment: The export factor partners with an import factor in the buyer’s country (e.g., a U.S. factor). The import factor assesses the buyer’s creditworthiness, invoice validity, and trade documents, leveraging local expertise.

  • Step 4: Getting Paid: The export factor advances 80–90% of the invoice (e.g., $45,000 for a $50,000 invoice), holding the rest in reserve.

  • Step 5: Payment Collection: The import factor collects the full amount from the buyer (e.g., $50,000 from the supermarket), deducts a fee (e.g., 4% or $2,000), and the export factor releases the reserve ($3,000) to you.

  • Step 6: Benefits: You get cash to fund trade, the factors share the fee, and the buyer pays as agreed.

  • Example: A Vietnamese furniture exporter sells a $200,000 invoice to a German retailer. The export factor in Vietnam advances $180,000, while the import factor in Germany collects payment, ensuring smooth cash flow.

• The Two-Factor Method (Per Factors Chain International - FCI)

  • The two-factor method, endorsed by FCI (a global factoring association), involves four parties: the exporter, importer, export factor (in the exporter’s country), and import factor (in the importer’s country).

  • The export factor advances cash and manages the exporter’s needs, while the import factor assesses the buyer’s credit and collects payment, reducing cross-border risks.

  • Example: RXIL (export factor) partners with a U.S. import factor to finance a $50,000 spice invoice. The U.S. factor checks the supermarket’s credit and collects payment, sharing the risk and fee with RXIL.

  • This method is standard in international factoring for its efficiency in handling local regulations, currencies, and buyer risks.

• Role of Import Factors in Assessment

  • Import factors, located in the buyer’s country, provide critical local expertise to assess invoices and reduce risks:

    • Creditworthiness Check: They evaluate the buyer’s payment history and financial stability using local credit reports (e.g., Dun & Bradstreet) and market knowledge.

      • Example: A U.S. import factor confirms a supermarket’s strong credit score for a $50,000 invoice.

    • Local Compliance: They ensure the invoice complies with local trade laws and customs regulations.

      • Example: A German import factor verifies a $200,000 furniture invoice meets EU standards.

    • Payment Collection: They collect payments in local currency and time zones, handling disputes or delays directly.

      • Example: A U.S. import factor collects $50,000 from the supermarket, navigating U.S. legal norms.

    • Risk Guarantee: In non-recourse factoring, the import factor may guarantee payment, absorbing losses if the buyer defaults.

      • Example: If the supermarket goes bankrupt, the U.S. import factor covers the $50,000, protecting the export factor.

• How Do Factors Secure Their Advance?

  • Recourse Factoring: If the buyer doesn’t pay, you repay the advance or provide another invoice.

    • Example: If the U.S. supermarket defaults on $50,000, RXIL asks the spice exporter to repay $45,000.

  • Non-Recourse Factoring: The factor (often the import factor) absorbs the loss if the buyer defaults, charging higher fees (5–7%) for international risks.

    • Example: If the German retailer doesn’t pay $200,000, the factor keeps the $180,000 advanced, and the exporter owes nothing.

  • Export Credit Insurance: Factors use insurance (e.g., ECGC in India) to cover non-payment losses.

    • Example: ECGC insures RXIL’s $45,000 advance if the supermarket defaults.

  • Two-Factor Guarantee: The import factor guarantees payment to the export factor, leveraging local legal systems.

    • Example: A U.S. import factor ensures RXIL gets $50,000 if the supermarket defaults.

  • Legal Agreements and Trade Documents: Contracts and documents (e.g., bill of lading) allow factors to collect directly from buyers.

    • Example: RXIL uses the spice invoice and shipping documents to demand $50,000 from the supermarket.

  • Reserve Amount: Factors hold 10–20% of the invoice to cover disputes or losses.

    • Example: RXIL keeps $5,000 of a $50,000 invoice to handle shortfalls.

  • Currency Hedging: Factors use forward contracts to lock in exchange rates, protecting against currency fluctuations.

    • Example: RXIL hedges to ensure $50,000 collected later is worth the same in rupees.

• Why Use Factoring in Export-Import?

  • Fast Cash: Funds shipping, customs, or production without waiting.

  • No Debt: Sells invoices, avoiding loan interest.

  • Risk Management: Non-recourse factoring or insurance protects against defaults.

  • Currency Handling: Factors manage currency conversion (e.g., dollars to rupees).

  • Collection Support: Import factors handle international payments, navigating foreign laws.

  • Example: A Bangladesh garment supplier gets $90,000 upfront for a $100,000 U.S. invoice, funding production while the factor collects payment.

• List of Factoring Companies in India

  • SBI Global Factors Limited: A State Bank of India subsidiary, offering domestic and export factoring for MSMEs, with FCI membership and a global network in 80+ countries.

  • Export-Import Bank of India (India Exim) Finserve: Launched in August 2023, focuses on export factoring for SMEs, offering quick payments and risk coverage.

  • IFCI Factors Limited: Provides international and domestic factoring, with FCI membership and advisory services for credit assessment. Based in New Delhi.

  • Receivables Exchange of India Ltd (RXIL): A TReDS platform backed by SIDBI and NSE, offering digital factoring for MSMEs, with growing export factoring services.

  • Drip Capital: A fintech providing non-recourse, collateral-free export factoring with digital processing and multi-currency options (USD, EUR, GBP).

  • India Factoring and Finance Solutions Pvt Ltd: Offers domestic and international factoring with 13 years of experience in receivable financing.

  • ECGC Limited: Specializes in export factoring and credit insurance for MSMEs, with FCI membership and buyer assessments via credit agencies.

  • Canbank Factors Limited: A Canara Bank subsidiary offering export and domestic factoring.

• Tips for Exporters and Importers

  • Choose FCI-member factors (e.g., SBI Global, IFCI) for reliable global networks.

  • Expect fees of 2–7% due to international risks; compare rates.

  • Ensure trade documents (invoices, bills of lading) are accurate for quick processing.

  • Work with creditworthy buyers (e.g., established retailers) for better terms.

  • Consider credit insurance (e.g., via ECGC) for risky markets.