Need for Export Factoring :
International Business poses various risks and challenges, like:
- Risks arising out of non-payment, political risk, commercial risk, exchange control risks etc.
- Difficulty to discover or understand the buyers’ financial situation.
- Difficulty to understand the sovereign risks.
- Lower realization in respect of sales against LCs inasmuch as the buyer is likely to deduct the cost of establishing LCs.
- Difficulties due to uniqueness of each geography with respect to currency, banking system, local trade practices and legal system.
- Customer's preference to trade in local currencies.
- Resistance by most domestic banks to providing the necessary financing on export receivables, which arise out of trade on open account terms.
Here, Export Factoring provides an attractive alternative.
SBIGFL covers credit risk of the exporter under Two Factor model of FCI. Under this model, there are four parties involved in a transaction: the exporter (seller), the domestic factoring company (viz. export factor), the foreign factoring company (viz. import factor) and the customer (buyer).