Export financing and the role of the factors in international trade transactions are the two highly specialized and field-specific areas in international trade financing; however, understanding the mechanisms of their work can be essential for acquiring better knowledge if the international trade markets as a whole. This paper investigates two main issues in exporting trade: the first is a probable explanation of the reason why an exporter would provide financing for an importer and whether there exists much risk in such an activity; the second one refers to the role of a factor in international trade transactions and the capability of said factor to aid an exporter. Various reference sources are used to confirm the arguments stated within the following essay.
Common knowledge is that every business aims to have profit, which means exporting companies are looking for the ways to be profitable as well. One of the essential factors for making sales successful is the export financial assistance. According to a Basic Guide to Exporting (2012), for a company it is important to establish and carefully follow credit principles and credit periods to secure itself against disreputable buyers but is also important to maintain a balance between risks and remaining a competitive market player (p. 193-195). Thus, an exporter is able to increase sales by allowing the importer to pay at a future date. However, Peter Boland (2011) in an article on risks involved in international trade finance emphasizes that financing the importer may be attended by some risk, for example, financial and operational risks or fraud (par. 5-7). Sometimes, when an importer is a small and unknown company these risks may come true, but they can also be mitigated by using insurance, exercising due diligence or by resorting to factoring (Export Finance Guide, 2010, par. 1-55).
According to a definition from a book “International Financial Management” by Jeff Madura, “since there is a danger that the buyer will never pay at all, the exporting firm may consider selling the accounts receivable to a third party, known as factor.” In essence, factoring can secure the exporter from the credit risks of an importer. However in its turn the accounts receivables will be bought by the factor at a price lower than their actual cash value. Ray Pereira (2011) in an article on international factoring notes that it has become an attractive alternative for exporters; the steady growth of such services and their popularity led to the fact that by 1995, the factors were already able to cover $23 billion in international trade (par. 1-6). Nevertheless, another guideline on factoring, issued by the Central Bank of Bosnia and Herzegovina, notes that factoring may be useful for large-scale companies rather than the small ones and while the use of a factor can make the exporting activities significantly easier, a substantial loss of revenue can be expected in certain circumstances, and the costs of factoring are usually higher than the costs of bank loans (Factoring: Advantages and Disadvantages of Factoring, n.d., p. 1-2). The abovementioned arguments make it evident that an exporting company should carefully approach the choice of tools when dealing with export trade, since most of the responsibility for the risks and profit still lies with the company itself, regardless of the presence or absence of any third-party support providers.
References
Basic Guide to Exporting (2012). Web.
Boland, P. J. (2011). Risks Involved in International Trade Finance: A Banker’s Perspective. Web.
Export Finance Guide (2010). Web.
Factoring: Advantages and Disadvantages of Factoring (n.d.). Web.
Madura, J. (2014). International Financial Management. Boston, MA: Cengage Learning.
Pereira, R. (2011). International Factoring. Web.