International factoring usually has two factors viz. export factor and import factor. The export factor looks at financing the exporter and collection of account receivables. The import factor evaluates the importer in respect of collecting the dues in time and assessment of chances of default by the importer.
The exporter on receipt of export order from an importer requests the export factor for limit approval on the importer. In turn export factor contacts the import factor for its approval for the same. Once the import factor confirms its approval, the exporter factor conveys commencement of the factoring arrangement to the exporter.
Upon shipment of goods to the importer, the exporter submits related documents to the export factor. The export factor verifies the documents and pays for them as agreed in the commitment to the exporter and forwards the document to import factor. The import factor collects the payment from the importer on due date as per invoice and remits the proceeds to export factor. The export factor adjusts the outstanding in its books from the proceeds received and residual amount (balance payment) will be paid to the exporter.
Usually, factoring is an ongoing arrangement between the client and Factor (Bank), where invoices raised on open account sales of goods and services are regularly assigned to “the Factor” for financing, collection and sales ledger administration.