Factoring and Forfaiting

A factor, i.e. a commercial bank or a specialized financial firm, can assist an exporter with financing through the purchase of invoices or accounts receivable. Export factoring is offered under an agreement between the factor and the exporter, in which the factor purchases the exporters short-term foreign accounts receivable for cash at a discount from the face value, normally without recourse, and assumes the risk on the ability of the foreign buyer to pay, and handles collections on the receivables. Thus, by virtually eliminating the risk of nonpayment by foreign buyers, factoring allows the exporter to offer open accounts, improves liquidity position, and boosts competitiveness in the global marketplace. Factoring foreign accounts receivables can be a viable alternative to export credit insurance, longterm bank financing, expensive short-term bridge loans or other types of borrowing that will create debt on the balance sheet. This method may be useful for more experienced exporters that are involved in multiple transactions and have a certain volume of yearly international sales. For more details on how factoring works and its pros and cons see Chapter 9 of the Trade Finance Guide. To find a factor, contact the Factors Chain International or the International Factoring Association. A forfaiter is a specialized finance firm or a department in banks offers non-recourse export financing through the purchase of medium-term trade receivables. Similar to factoring, forfaiting virtually eliminates the risk of nonpayment, once the goods have been delivered to the foreign buyer in accordance with the terms of sale. However, unlike factors, forfaiters typically work with the exporter who sells capital goods, commodities, or large projects and needs to offer periods of credit from 180 days to up to seven years. In forfaiting, receivables are normally guaranteed by the importers bank, allowing the exporter to take the transaction off the balance sheet to enhance its key financial ratios. Forfeiting typically requires a bank guarantee for the foreign buyer. It allows opening an account in markets with relatively high credit risk. It is can be more expensive than commercial bank financing. For more information on forfaiting see Chapter 10 the Trade Finance Guide. To find a forfaiter, you may contact the Association of Trade and Forfaiting in the Americas, Inc. or the International Forfaiting Association.

The factory method pattern is an object-oriented design pattern to implement the concept of factories. Like other creational patterns, it deals with the problem of creating objects (products) without specifying the exact class of object that will be created. The creation of an object often requires complex processes not appropriate to include within a composing object. The object's creation may lead to a significant duplication of code, may require information not accessible to the composing object, may not provide a sufficient level of abstraction, or may otherwise not be part of the composing object's concerns. The factory method design pattern handles these problems by defining a separate method for creating the objects, which subclasses can then override to specify the derived type of product that will be created.

Some of the processes required in the creation of an object include determining which object to create, managing the lifetime of the object, and managing specialized build-up and tear-down concerns of the object. Outside the scope of design patterns, the term factory method can also refer to a method of a factory whose main purpose is creation of objects. Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. In "advance" factoring, the factor provides financing to the seller of the accounts in the form of a cash "advance," often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor's discount fee (commission) and other charges, upon collection. In "maturity" factoring, the factor makes no advance on the purchased accounts; rather, the purchase price is paid on or about the average maturity date of the accounts being purchased in the batch. Factoring differs from a bank loan in several ways. The emphasis is on the value of the receivables (essentially a financial asset), whereas a bank focuses more on the value of the borrower's total assets, and often considers, in underwriting the loan, the value attributable to non-accounts collateral owned by the borrower also, such as inventory, equipment, and real property,[1][2] i.e., matters beyond the credit worthiness of the firm's accounts receivables and of the account debtors (obligors) thereon. Secondly, factoring is not a loan it is the purchase of a financial asset (the receivable). Third, a nonrecourse factor assumes the "credit risk", that a purchased account will not collect due solely to the financial inability of account debtor to pay. In the United States, if the factor does not assume credit risk on the purchased accounts, in most cases a court will recharacterize the transaction as a secured loan. It is different from forfaiting in the sense that forfaiting is a transaction-based operation involving exporters in which the firm sells one of its transactions,[3] while factoring is a Financial Transaction that involves the Sale of any portion of the firm's Receivables.[1][2] Factoring is a word often misused synonymously with invoice discounting, known as "Receivables Assignment" in American Accounting ("Generally Accepted Accounting Principles"/"GAAP" propagated by FASB)[2] - factoring is the sale of receivables, whereas invoice discounting is borrowing where the receivable is used as collateral.[2] The three parties directly involved are: the one who sells the receivable, the debtor (the account debtor, or customer of the seller), and the factor. The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), often, in advance factoring, to obtain cash. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights associated with the receivables.[1][2] Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and, in nonrecourse factoring, must bear the loss if the account debtor does not pay the invoice amount due solely to his or its financial inability to pay. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections; however, non-notification factoring, where the client (seller) collects the accounts sold to the factor, as agent of the factor, also occurs. There are three principal parts to "advance" factoring transaction; (a) the advance, a percentage of the invoice face value that is paid to the seller at the time of sale, (b) the reserve, the remainder of the purchase price held until the payment by the

account debtor is made and (c) the discount fee, the cost associated with the transaction which is deducted from the reserve, along with other expenses, upon collection, before the reserve is disbursed to the factor's client. Sometimes the factor charges the seller (the factor's "client") both a discount fee, for the factor's assumption of credit risk and other services provided, as well as interest on the factor's advance, based on how long the advance, often treated as a loan (repaid by set-off against the factor's purchase obligation, when the account is collected), is outstanding.[4] The factor also estimates the amount that may not be collected due to non-payment, and makes accommodation for this in pricing, when determining the purchase price to be paid to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment.[2]

Methods of Payment
Cash-in-Advance
With this payment method, the exporter can avoid credit risk, since payment is received prior to the transfer of ownership of the goods. There are three types of cash- in advance- payment method: wire transfer, credit card, and payment by check. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring payment in advance is the least attractive option for the buyer, as this method creates cash flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who may be willing to offer more attractive payment terms. For more detailed information on the cash-in-advance payment method see Chapter 2 of the Trade Finance Guide.

Letters of Credit
Letters of credit (LCs) are among the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter provided that the terms and conditions have been met, as verified through the presentation of all required documents. The buyer pays its bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but you are satisfied with the creditworthiness of your buyers foreign bank. An LC also protects the buyer since no payment obligation arises until the goods have been shipped or delivered as promised. The letters of credit can take many forms: irrevocable or revocable, confirmed, or special (transferable, revolving or standby). For more detailed information on the payment method involving various types of letters of credit see Chapter 3 of the Trade Finance Guide. To obtain a letter of credit, contact the international division of your local bank . Alternatively, see the list of commercial banks listed by state on the U.S. Export Banks Lender Referral List.

Documentary Collections
A documentary collection is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporters bank), which sends documents to a collecting bank

(importers bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. Documentary collections involve the use of a draft that requires the importer to pay the face amount either on sight (document against paymentD/P) or on a specified date in the future (document against acceptanceD/A). The draft lists instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients under collections, documentary collections offer no verification process and limited recourse in the event of nonpayment. Drafts are generally less expensive than letters of credit. For more detailed information on the letter of credit payment method see chapter go to Chapter 4 of the Trade Finance Guide. To obtain a letter of credit, contact the international division of your bank. Alternatively, see the list of commercial banks listed by state on the U.S. Export Import Banks Lender Referral List

Open Account
An open account transaction means that the goods are shipped and delivered before payment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intense competition for export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors. However, with the use of one or more of the appropriate trade finance techniques, such as export working capital financing, government-guaranteed export working capital programs, export credit insurance, export factoring, the exporter can offer open competitive account terms in the global market while substantially mitigating the risk of nonpayment by the foreign buyer. For more detailed information on the open account payment method see Chapter 5 of the Trade Finance Guide