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算授課教師：XXXInternationalSettlementChapter8InternationalFactoring

Wehaveknownthatletterofcreditisaworldwidelyacceptedpaymenttechniqueandcanberegardedasthemostfrequentlyusedone.Infact,notallthecustomersandpotentialcustomersarehappytoprovideL/C,thoughitisgoodtouseit.Ifonewantstoexpandsalesintocertainmarket,onemustbeabletooffermore“buyer-friendly”termssuchasopenaccountorD/Aterms.Factoringcanhelptooffersuchtermswithoutreducingthesecurityoffinancing.ItisagoodsupplementtoopenaccountorD/Aterms.8.1OriginationandDevelopmentofFactoring

Theoriginoffactoringcanbetracedbacktotheindustrialrevolution,when,inordertoexporttheirgoods,thetextilemillsinthenorthernpartofEnglandappointedagenciesinNorthAmericatoselltheirproductsandthenremittedtheproceedsbacktoEngland.Theseagencieswerejusttherudimentoffactoringtoday.8.1OriginationandDevelopmentofFactoring

ComparedwiththeirprincipalinEngland,theseagencieshadmoreconnectionwiththecustomersinAmerica,thustheycommandedabetterunderstandingofthecompaniestowhichtheproductswouldbesold.Atthattime,factoringinvolvedonlythepurchasewithoutrecourseofaccountsreceivablefromtheEnglandsellers.Withthedevelopmentofinternationaltradeandtheintensificationofcompetition.8.1OriginationandDevelopmentofFactoring

Factoringhasdevelopedintoaservicepackagethatcontainsthecreditinvestigationintothebuyers,ledgerbookkeeping,managementofaccountsreceivableandriskprotection.Factoringdidnotdevelopveryquicklyatthebeginningstage.Inthe1950s,itwasonlyconfinedtotheUnitedStates.Bythe1960s,domesticfactoringcouldonlybefoundinNorthAmericaandseveralcountriesinEurope.8.1OriginationandDevelopmentofFactoring

Todayfactoringhasbecomeacommonbusinesspracticeoneverycontinentaroundtheworld.Hundredsofbusinesseswithmillionsofcustomersworldwidearecurrentlyusingfactoringasfinancingtooltosafeguardthebenefitofconsistentcashflows,toloweradministrationcosts,toreducecreditrisksandtoassuremoretimetoconcentrateontheircorebusinessactivities.8.2DefinitionofFactoring

AccordingtotheGeneralRulesforInternationalFactoring,afactoringmeansacontractpursuanttowhichasuppliermayorwillassignaccountsreceivabletoafactorforfinancingexporttrade,ledgeringreceivables,collectingproceedsand/orprotectingagainstbaddebts.8.2DefinitionofFactoring

AccordingtoConventiononInternationalFactoring,thefactoristoperformatleasttwoofthefollowingfunctions:financeforthesupplier,includingloansandadvancepayments;maintenanceofaccounts(ledgering)relatingtothereceivables;collectionofreceivables;protectionagainstdefaultinpaymentbydebtors.Whenthesellerandthebuyerareindifferentcountries,theserviceiscalledinternationalfactoring.8.2DefinitionofFactoring

Afactoringcontractisanagreementbetweenthefactorandtheseller,underwhichthefactorpurchasestheseller’saccountsreceivable,normallywithoutrecourse,andassumestheresponsibilityforthedebtor’sfinancialinabilitytopay.Ifthedebtorgoesbankruptordoesn’tpay,thefactorwillpaytheseller.TheFactorChainInternational(FCI),astheforemostfactoringnetworkwiththelargestshareoftheworldmarketintermsofvolume,hasbeenresponsibleforintroducingmoreandmorebusinessestousethismethodininternationaltrade.8.3ServiceItemsofFactoring8.3.1

FinancingfortheSupplier,IncludingLoansandAdvancePayment

Underatypicalfactoringoperation,aftershippingthegoods,theexportersubmitscopyinvoicetothefactor,andthefactorprovidesadvancenotmorethan85%oftheinvoicevaluewithoutrecourse.Theadvancesshouldnotexceedtheapprovedlineofcredit.8.2DefinitionofFactoring

Beforefinancingtotheexporters,thefactorwillusuallyinvestigatethecreditworthinessofeachoftheexporter’scustomers(i.e.thebuyers).Thecontentsofsuchaninvestigationgenerallyincludethebuyer’sregisteredaddress,operationstyle,assetstoliabilityratio,recentoperationalstatistics,etc.Apartfromthese,theexchangecontrol,financialpolicies,politicalstabilityofthebuyer’scountrywillallaffectthecreditlinethatwillbegrantedtotheexporters.8.2DefinitionofFactoring

Theappraisalofthebuyer,screditisbasedonthecreditinvestigationconductedabove.Thehigherthecreditworthinessofthebuyeris,thelargerthecreditlinewillbe.Afterthefactorhasapprovedacertaincreditlinetothebuyer,itwillnotifythesellerofthelineandthen,basedontheapprovedcreditlinetothebuyer,thesellerwillsignthesalescontractwiththebuyer,thusreducingtheriskofnon-paymentbythebuyerinthefuture.Thecreditinvestigationusuallyhasoneofthefouroutcomes.8.2DefinitionofFactoringApprovalofaLineofCredit

Acreditlineisestablishedwiththelineappropriatefortheimporter’screditworthiness.Theexportercan,withoutfurtherinquiryandinaccordancewiththesalescontract,shipthegoodstotheimporter,providedtheaccountsreceivabledonotexceedthecreditline.Thefactoragreestopurchasealltheaccountsreceivablefromthesellerandassumetheresponsibilityofnon-paymentifthebuyerfailstopay.8.2DefinitionofFactoringApprovalofSpecificInvoice

Thismeansthefactoronlyagreestopurchasethespecificaccountsreceivablefromtheseller(suchasamountsnotexceedingaspecificamount,accountsreceivablefromspecificareasorfromspecificbuyers).8.2DefinitionofFactoringDeclination

Ifthefactorjudgesthecreditstandingofthebuyertoanunacceptablerisk,itwillnotpurchasetheaccountsfromthebuyer.Theexporterhastheoptionofinsistingonmakingthedealingwiththeimporterathisownrisk,orfacilitatingthetransactionbyrequiringletterofcreditopenedfromtheimporter.8.2DefinitionofFactoringLimitedApproval

Thismeansthefactorwillnotpurchasealloftheseller’saccountsreceivableastheimporterismarginallycreditworthy.Thefactorwilllimithisobligationtotheexportertoalesseramount.Theinvoiceamountexceedingthelimitedapprovalwillbeattheexporter’sowndiscretionandthecreditriskofthispartwillbebornebytheexporterhimself.8.3ServiceItemsofFactoring8.3.2MaintenanceofAccountsReceivable—Ledgering

Mostofthefactorsarelargecommercialbanks.Theypossessadvancedandsoundaccountingmanagementsystems.Byexecutingcomputersystems,factorskeepcontactswithforeigncorrespondentfactors,automaticallymanagetheaccountsreceivable.8.3ServiceItemsofFactoring8.3.3AccountsReceivableCollection

ByusingthepaymentmethodssuchasopenaccountorD/A,exportersarealwaysfacedwithhighcreditriskastheexportermaynotbefamiliarwithbusinessenvironmentandtradecustomsoutward.Whenfactoringserviceagreementsarereached,thefactorwillberesponsibleforthecollectionofaccountsreceivablebyusinghisinternationalcorrespondentnetworks.Thehighqualityserviceprovidedbythefactorwillensuretheefficiencyoftheproceedscollection.Theexportercanconcentrateonhiscorebusinessbyoutsourcingthefundscollectionbusinesstothefactor.8.3ServiceItemsofFactoring8.3.4ProtectionAgainstBuyer’sCreditRisk

Thepreconditionforprovidingfinancetotheexporteristhatthefactorhasgrantedacreditlinetothebuyer.Itisnecessaryforthefactortoevaluatetheimporter’spaymentobligationcasebycase,makingthepreliminarycreditassessment.Asperthecreditworthinesschangingoftheimporter,actualcollectionperformanceandthebusinessneedsoftheexporter,thefactorwillverifyandadjusttheimporter’screditapprovalperiodically.8.4MainFactoringBehavior

Ininternationalfactoringbusiness,thebehaviorofapproval,assignment,finance,reassignmentandissuingcreditnoticehappensfrequently.(1)Approval.Itmeansthefactorassessesthecreditreputationoftheimporter,thenguaranteesaspecificamounttobearthenon-paymentriskoftheaccountsreceivableduetotheimporter.(2)Assignment.Itmeanstheexportertransfersalltherights,titlesandinterestsoftheaccountsreceivabletothefactor.8.2DefinitionofFactoring

(3)Finance.Itmeansaspertheaccountsreceivableassignedtohimbytheexporter,attheexporter’sapplication,thefactorprovidesexportfinancetotheaccountsreceivableinportion.(4)Reassignment.Itmeansthetransfereeoftheaccountsreceivableassignstheaccountsreceivabletoanotherpartyfurther,suchasthefactorreassignstheaccountsreceivableassignedbythesuppliertotheotherfactors.(5)Issuingcreditnotice.Forkindsofreasons,theexporteragreestoreducethecollectiveamountandissuethecreditnoticetotheimporterasifthefundhasbeencollected.8.5MainFeatureandFunctionofFactoring

Astoday’sinternationalmarkethaschangedfromtheseller’smarkettothebuyer’smarket,oneofthegreatestproblemsfacingexportersaretheincreasingdesiresoftheimporterstoconducttradeonopenaccountterms.Thisoftenmeanspaymentisreceivedmanyweeksorevenmonthsafterdeliveryofgoods.Itisobviousthatthenon-paymentordelaypaymentoftheimporterwillcauseseverecashflowshortagetotheexporter.Underthisbackground,theadoptionofinternationalfactoringisagoodchoicefortheexporters.8.2DefinitionofFactoring

Generallyspeaking,themainfeatureoffactoringcanbesummarizedasfollows:itisapplicabletoopenaccountandD/Aterms;itisalwaysinitiatedbytheexporter,andtheimporteralwayslocatesindevelopedcountriesorareas;thefactoronlyprotectsagainsttheimporter’screditrisk,regardlessofcommercialriskandcountryrisk;thefactorserviceisalwaysconductedonthebasisofnon-recourse.8.2DefinitionofFactoring

Thebenefit(functions)internationalfactoringprovidescanbesummarizedas:itincreasessalesinforeignmarketbyofferingcompetitivetermsofsales;itprotectsagainstexportcreditlosses;itacceleratescashflowbymoreefficientcollectionmethod,solowercostsofthetransactionpartywillbeinvolvedcomparedwithletterofcredit;itcanincreaseliquiditytofinanceworkingcapitalandtoenhancetheexporter’sborrowingpotential.8.6BasicPartiestoFactoring8.6.1TheSupplier

Thesupplier(alsocommonlyreferredtoasclientorseller)isthepartywhoinvoicesforthesupplyofgoodsortherenderingofservices.Usually,thesuppliersignsafactoringcontractwithanexportfactorinhisowncountry.Underafactoringcontract,thesupplierassignsexportreceivablestotheexportfactor.8.3ServiceItemsofFactoring8.6.2TheExportFactor

Theexportfactoristhepartytowhichthesupplierassignshisreceivablesinaccordancewiththefactoringcontract.Theexportfactorisusuallyinthesamecountryofthesupplierandisresponsibleforallaspectsofthefactoringserviceincludingtheadvancepaymentfacilitytothesupplier.8.3ServiceItemsofFactoring8.6.3TheImportFactor

Theimportfactoristhepartytowhichthereceivablesareassignedbytheexportfactor.Theimportfactorisusuallyinthesamecountryofthedebtorandhefurnishessecurityforinvestigatingthecreditworthinessofthedebtor,andheisresponsibleforpaymentofthedebtandfullprotectionagainstbaddebts.8.3ServiceItemsofFactoring8.6.4TheDebtor

Thedebtor(alsocommonlyreferredtoasbuyerorcustomer),isthepartywhoisliableforpaymentofthereceivablesarisingfromthesupplyofgoodsorrenderingofservices.8.7ProceduresofFactoring

Normally,thesuppliershouldapproachafactorinhisowncountryandsignsafactoringagreementbeforeheofficiallysignsasalescontractwiththeimporter.TheproceduresoffactoringareexplainedbyChart8.1.8.2DefinitionofFactoring

Chart8.1ProceduresofFactoring8.2DefinitionofFactoring①Thesupplierandtheexportfactorsignafactoringcontract,entrustingtheexportfactortoinvestigatethedebtor’screditworthinessandtoapproveacreditline.②Theexportfactornotifiestheimportfactorofthefactoringcontractandentrustshimtoinvestigatethedebtor’screditworthiness.③Theimportfactorinvestigatesthedebtor’scredit.④Theimportfactornotifiestheexportfactoroftheinformationonthecreditworthinessofthedebtorandtheapprovedcreditline.8.2DefinitionofFactoring⑤Theexportfactornotifiesthesupplieroftheresultoftheinvestigationandtheapprovedcreditline.⑥Thesuppliersignsthesalescontractwiththedebtor,andtheinvoicevalueshouldbelimitedwithinthecreditlineapprovedbythefactor,andthenthesuppliershipsthegoodstothedebtor.⑦Thesuppliersubmitstheinvoicecopytotheexportfactorforfinance.⑧Theexportfactoradvancesabout85%oftheinvoicevaluetothesupplier.⑨Theexportfactortransferstheinvoicecopytotheimportfactor.⑩Theimportfactordunsthedebtortoeffectpaymentperiodically.8.8TypesofFactoring8.8.1SingleFactoring&Co-Factoring

Singlefactoringinvolvesonlyonefactor,anditisaprimitivemodelofinternationalfactoring.Nowadays,itismainlyusedindomesticfactoring.Itinvolvesthreerelatedparties:exporter,importerandtheimportfactor.Co-factoringinvolvesfourrelatedparities:exporter,importer,exportfactorandimportfactor.Itisthemostcommonfactoringpracticearoundtheworld.8.3ServiceItemsofFactoring8.8.2Non-RecourseFactoring&RecourseFactoring

Undernon-recoursefactoring,thefactorhasnorecourserighttotheapprovedreceivables.Inpractice,mostofthefactoringbusinessarenon-recoursefactoring.Underrecoursefactoring,thefactorpresentsrecourserighttotheapprovedreceivables.8.3ServiceItemsofFactoring8.8.3FinancedFactoring&MaturityFactoring

Accordingtothetimewhentheexportfactorprovidesthesupplierwithfinancing,factoringcanbedividedintofinancedfactoringandmaturityfactoring.Underfinancedfactoring,whenthesupplierassignshisreceivablestotheexportfactor,usually,thesuppliercanimmediatelyobtain85%oftheinvoicevalue,andafterthepaymentofthedebtor,thesuppliercanobtaintheremaining15%minustheinterestandchargesfromtheexportfactor.Underthematurityfactoring,whenthesupplierassignshisreceivablestotheexportfactor,usually,thesuppliercannotobtaintheproceedsuntilthedebtormakesthepayment.8.3ServiceItemsofFactoring8.8.4DisclosedFactoring&UndisclosedFactoring

Underadisclosedfactoring,thesuppliernotifiesthedebtorinawrittenformofhisfactoringcontract,andthefactorinstructsthedebtortoremitproceedsdirectlytothefactor.Underanundisclosedfactoring,thesupplierconcealsthefactoringcontractfromthedebtor,soastoavoidthedebtor’sdoubttothesupplier’sassignmentofreceivables.8.3ServiceItemsofFactoring8.8.5FullServiceFactoring&PartialServiceFactoring

Underfullservicefactoring,thefactoristoperformallthefunctionsoffinancingforthesupplier,accountsreceivableledgering,collectionofreceivablesandprotectionagainstdefaultinpaymentbydebtors.Whileunderpartialservicefactoring,thefactoronlyprovidespartialoftheabovementionedfourfunctions.8.9TheComparisonofFactoring,L/C,D/A,andO/A

Factoringhasmanyadvantages.ThegreatestoneisthatitallowsthesuppliertotradeonopenaccountandD/Atermswithmuchlowerrisk.Withthehelpofthefactor,thesuppliercanunderstandthebuyer’screditworthiness,whichwillavoidthecommercialriskcausedbyvagueunderstandingofthecounterparts.Asforthesupplier,hecanexpandsalesabroadbyofferingcompetitivetermsandconditions.Thecreditlossessufferedbythesupplierwillbecoveredbythefactor.8.2DefinitionofFactoring

Asfarasdebtorsareconcerned,deferredpayment,usually30~90days,willbegranted.Theycanpurchaseonopenaccountterms.Theycanexpandtheirpurchasingpowerwithoutusingexistinglinesofcredit.Also,byusingfactoring,itishelpfulforthedebtortogetthegoodswithstipulatedquantityandquality.Theinternationalfactoringalsohasitsdisadvantages.8.2DefinitionofFactoring

Asforthesupplier,onlythefactorwillprotectagainstthedebtor’screditrisk.Ifdisputesconcerningcommodityquality,quantityanddeliveryperiodoccur,thefactorwillnotundertaketheliabilitytoeffectpayment.Whenthebusinesssituationdeteriorates,themoralhazardofthedebtortoraisedisputesintentionallymayoccurinordertoescapefrompayment.Tothedebtor,becauseofthehigherfeeoffactoring,normallywhichwillbe1%~3%ofthecargovalue,heshouldpaymoreforthegoods.ComparedwithL/C,thehandlingproceduresoffactoringaremoresimplified.8.2DefinitionofFactoringComparison

ItemsFactoringD/AO/AL/CBuyer’s

Credit

RiskGuaranteeYesNoNoYesBuyer’s

ExpenseLow——HighSupplier’s

ExpenseHigh——LowBuyer’s

Credit

Line

OccupationNo——YesFinancial

Flexibility

to

BuyerLowHighHig