Some popular forms of other private financing consist of export trading companies, factoring, and forfaiting.
Export trading companies In October 1982, President Reagan signed into law the Export Trading Company Act, to help small and medium-size firms sell their goods overseas. Originally, the Export Trading Company Act was conceived as the US answer to highly successful Japanese trading companies, which handle most of that country's exports.
The Export Trading Company Act of 1982 removed two major barriers that had long put US exporters at a disadvantage. First, this Act allows bank holding companies, previously barred by Federal regulations from investing in commercial enterprises, to invest in export trading companies. Second, it permits competing companies to join for export purposes without fear of antitrust ramifications. An export trading company (ETC) must obtain certification from the Secretary of Commerce that it will not restrain domestic or export trade of the USA. When the Secretary of Commerce notifies the Attorney General of certification, the ETC is exempted from both criminal antitrust prosecution and the Bank Holding Company Act, so long as its activities conform to those described in the certification.
Export trading companies engage primarily in two forms of activity: trade intermediation and export outlets for US manufacturing companies. In their role as trade intermediaries, export trading companies can provide small and medium-size firms with comprehensive "one-stop" services, such as market analysis, distribution services, documentation, financing, foreign-exchange transactions, transportation, and legal assistance. They can buy products from other US companies and export these products either through their own outlets or to outside distributors.
Factoring Factors buy a company's accounts receivable largely on a nonrecourse basis and thus accelerate the conversion of the company's claims against its customers. "Nonrecourse" means that the factor has no right to claim reimbursement from the seller of accounts receivable if the seller's customers fail to pay their bills. Factors perform a number of additional functions such as credit checking, bookkeeping, collecting accounts, and risk bearing. The factor reviews the credit of the borrower's customers and establishes credit limits in advance. The maximum amount of advance against uncollected accounts receivable is established as a percentage of the invoice value. The factor receives an interest charge on the daily balance of advances plus a commission for credit analysis, bookkeeping, collecting accounts, and risk taking.
Exporters may turn to a factor when they have difficulty collecting on open-account sales or when their bank is unwilling to collect notes receivable. Factors' rates on foreign accounts are usually higher than those of banks. Thus, factors are frequently used as a last resort by exporters who need funds badly and/or have almost no hope of collecting.
The factor's credit investigation of the exporter's customers is relatively quick and inexpensive. For this reason, even if the exporter does not discount his accounts receivable, he can still use the factor's facilities to estimate his prospective accounts' creditworthiness. If the exporter discounts his accounts receivable on a nonrecourse basis, the factor will assume all commercial and political risks of nonpayment. For these services, factors charge a commitment fee of 1—2 percent and a rate of interest in excess of the prime lending rate.
In June 1999 the Factors Chain International, the world's largest network of factoring companies, reported that 700 factors from 50 countries had financed $500 billion worth of exports in 1998. An exporter's use of factors depends on two considerations. The first consideration is whether the exporter can perform credit evaluation functions as well as the factor. Because large international factors evaluate the same customer for many companies, they build credit files and expertise, allowing them to evaluate credit at a lower cost than the exporter. The second consideration is whether the availability of funds and the interest charged by alternative sources are more attractive than those offered by the factor.
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