Factoring

Factoring is a comprehensive financial tool in which an exporter transfers accounts receivable to a factor, who provides services such as financing, importer credit assessment, sales ledger management, credit risk guarantee, and collection of receivables. It is commonly used in open account (O/A) or documents against acceptance (D/A) settlement methods, and is suitable for exporters who wish to recover funds early and transfer buyer credit risk. When using factoring, note that: factors usually require good buyer creditworthiness and may retain recourse (recourse factoring) or non-recourse (non-recourse factoring); costs include factoring commission and financing interest, which are relatively high. Compared with letters of credit (L/C), factoring is more flexible but risk protection depends on the factor's credit; compared with forfaiting, factoring is mostly used for short-term trade and often involves multiple small invoices. Foreign trade practitioners should clarify the type of factoring, fee structure, and the legal environment of the buyer's country to avoid disputes arising from improper notification of assignment of receivables.