Risks in

International Trade

New Techniques…

Factoring Forfaiting

What is Factoring?

FACTORING is a “continuing arrangement” between a financial institution (the factor) and a business concern (the client) selling goods or services to trade customers (the customer) whereby the factor purchases the client’s accounts receivables/book debts

Factoring Mechanism

Factoring Services

Besides purchase of accounts receivables, a factor may provide a wide range of services such as:

a) Sales Ledger administration b) Debt Collection services c) Credit Information services d) Advisory services

Non-Recourse Factoring

It gives protection against bad debts to the client

In other words, in case the customer fails to pay, the factor will have ‘no recourse’ to the client and will have to absorb the bad debts himself

It is popular in developed countries

Cross Border Factoring / International Factoring

In the international business transactions, factoring services are provided by factors of both countries

This is known as Cross Border Factoring / International Factoring

International Factoring

Under Export Factoring, a factor in India factors export invoices drawn on overseas buyers and prepays the client an agreed percentage of the invoice value immediately

The factor handling the collection of export receivables of clients (exporters) is called Export Factor (EF) and the factor in buyer’s country who undertake collection and credit protection services is called Import factor

International Factoring

In Export Factoring, the Export Factor appoints an Import Factor, who provides credit protection / exposure limits for a particular importer and only upon such approval the Export Factor provides financial assistance to the Indian Exporter

In view of this there is no requirement of a letter of credit or a credit insurance cover

Benefits to Exporters

Elimination of the cost and delays experienced in transacting business under LC

The import factor offers credit risk protection in case buyer does not pay invoices with in 90 days of due date

ECGC policy cost can be saved. There is reduction is administrative cost as the exporter will be dealing with only one Export Factor irrespective of the number of countries involved.

Benefits to Exporters

The exporter can obtain valuable information on the standing of the foreign buyers on trade customs and market potential in order to expand his business

The following up of receivables by import factor will speed up the collections

Usually, as factors provide finance up to 90% on export invoices, the exporter has an improved cash flow and his liquidity improves markedly

Benefits to Importers

He can pay invoices in the country locally He deals with the local agency, i.e. the Import Factor Minimum documentation required The cost of Letters of Credit and delay on account of LC’s are eliminated. All communication is in his own language.

Factoring – Global ScenarioFactoring volume increased from 724 Bn Euro in 2002

to 1,325 Bn Euro in 2008.Total of America and Europe accounted for approx

80% of the global factoring businessAsia’s factoring volume accounts for approx 18% of

global factoring volumeChina, Japan, and Taiwan account for approx 90% of

the Asia’s factoring volume India share in total factoring business of Asia in only

2.2%.

FACTORING AROUND THE WORLD

( in Millions of Euro)

2003 2004 2005 2006 2007 2008 2009

Europe 546,935 612,504 715,486 806,983 932,269 888,533 876,649

Americas 104,162 109,619 135,240 140,493 149,673 154,195 142,013

Africa 5,840 7,586 6,237 8,513 10,705 13,263 14,796

Asia 88,933 111,478 135,470 149,606 174,244 235,512 209,991

Australasia 13,979 18,417 23,380 27,853 33,780 33,246 40,110

TOTAL 759,849 859,604 1,015,813 1,133,448 1,300,671 1,324,749 1,283,559

Forfaiting

The word forfaiting is derived from the French term “ a forfait ” which means “relinquishing a right”

Forfaiting is the discounting of international trade receivable on a 100% "without recourse" basis

It is a form of suppliers credit involving the sale or purchase of receivables falling due at some future date

Forfaiting

Traditionally, forfaiting is fixed interest rate and medium term (3-5 years) financing

Forfaiting is generally suitable for high value exports like heavy machinery, capital goods, consumer durable, vehicles, bulk commodities, consultancy and construction contracts and project exports

Benefits

Enhances competitive advantageAbility to provide vendor financing making products

more attractiveEnables the exporter to do business in risky countries Increases cash flow. Forfaiting converts a credit-based

transaction in to a cash transaction

Benefits

Elimination of the following Risks associated with cross border transactions:

Commercial Risk - The risk of non-payment by a non-

sovereign or private sector buyer or borrower in his home currency arising from insolvency

Political Risk - The risk of the borrower country government actions, which prevent or delay the repayment of export credits

Benefits

Transfer Risk - The risk of an inability to convert local currency into the currency in which debt is denominated

Interest Risk - The risk of interest rate fluctuations during

the credit period of the transaction Exchange Risk - The risk of exchange rate fluctuations

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