The term invoice discounting is a tool that is used in the financing in international trade. It helps the company to get their funds after sending certain invoices. This tool is an important thing for the expansion and grows of a company (Zhang and Thomas 2015). Invoice discounting helps to allow all the capital to be used for the development of the company and it helps to maintain the cash flow within the company to retain a balance in the expansion process. The speedy process of the tool assists the company not to take any alternative way to collect the funds. Therefore, the company can work without any additional pressure (Chataway et al. 2016).
There are certain processes present that show the way this tool works. It has been mentioned as follows:
Therefore, it can be observed that this process of invoice discounting is quite systematic and time can be saved in this. In various business sectors, this tool is used for certain reasons. The company could obtain certain advances from the customers on selective or whole ledger basis. Further, the fast funding method has helped the company to expand their business. The process of invoice discounting is quite easy and the companies in this method are facing less trouble. Therefore, the business entrepreneurs could experience a hassle free method by using digital interface. Further, certain personal customer support could be obtained from this system and there is no hidden cost. It helps to understand all the business costs specifically.
The term factoring is a part of the financial transaction and this process is adjacent to the invoice discounting method. Financial transaction is an agreement that used in between the buyer and exporter to generate the payment process (Lekkakos and Serrano 2016). In factoring process, certain invoices are sending by a company to a third party on certain discount. Certain companies are factoring their receivable assets in some urgent situations. In summary, factoring is a cash management method that has been used by many companies. In this process, after an invoice has been generated when the customer makes sale, right to collect the invoice has been enable by the factoring process. The credit in this process extends on the client’s customer and therefore, the paying ability of the customers could be understood in this process. it is a sale of an asset (Tanrisever et al. 2015).
The term forfaiting is an arrangement that is used in the international trade finance. Originally, the exporters who have a will to sell their receivable to a forfeiter have used this tool. It is a medium term capital goods financing (Busse 2014). In this process, the forfeiter is taking all the risks regarding the receivables of the exporter on certain marginal costs. Sale of the firm transaction is the main subject matter in this process and this distinct the term from the factoring, where the subject matter of the transaction is buying financial assets.
There are certain differences present in between factoring and forfaiting. Both the terms are quite popular in the different business segmentation; more specifically in the export financing. However, the scope, application and concept of both the terms are different. It states as under:
In case of international trade business, two contracts are quite popular such as the Free on Board (FOB) and Cost, Insurance and Freight (CIF) contracts. The terms of these contracts are included in the trade agreement with an intention to retain uniformity and clarifications in the international agreements. However, the nature of the terms is not mandatory and the parties can change or amend the rules as required. The International Chamber of Commerce develops the terms of these contracts (Maggi 2014). The terms of those contracts are imposing certain duties on the parties to the contract, price of the goods and delivering method of the goods. Certain terms are required to be included in the Sale contract between the exporter and the importer. The terms could be categorised as follows:
In case of international trade and contract, goods are generally delivered through ship. Therefore, shipping is an important thing. However, before generating process of shipment, certain processes are required to be taken into place such as enter into an agreement to sale and both the parties are required to be given their consent on the same. When all the parties to the sale agreement will be agreed on the terms of the contract, the exporter will generate the shipment process. The rules relating to the shipment should be based on the Shipping Incoterms rules (Kim and Jang 2015). Further, in this case, certain export documents are necessary and further, transportation documents are required. Insurance certificate is also required here and after collecting all such certificates, the shipment process will be taken into place.
In case of international trade, both the parties have certain duties and responsibility regarding the proper delivery of the goods. However, the duties of the exporter and importer have been discussed below:
It is the common principle of sale contract that both the parties have to maintain the terms and conditions of the contract. According to the general rule of the international trade, the exporter should have to deliver the goods in time and hand over all the necessary documents to the importer or the buyer (Picciotto 2017). Further, after the goods have been delivered, the exporter must have to transfer the ownership to the buyer and the process should have to follow the guidelines of CISG. Further, the exporter should have to deliver the goods within the stipulated period and to the place agreed between the parties. Before the shipment process, both the parties should have to check the quality and quantity of the goods. This rule has been mentioned in Kling & Freitag GmbH v. Societa Reference Laboratory S.r.1. (2004). Article 31 of CISG should govern the contractual autonomy of the parties. In this Article, certain standards have been mentioned for the exporters so that they can deliver the goods by maintaining all the provisions of the sale contract.
Certain duties have been imposed under the CIF contract that is mandatory in nature in case of international trade. An invoice regarding the contracting goods is required to provide by the exporter for making the confirmation of the sale. The export should have to obtain certain export licence in his expenditure and should have to perform all the necessary formalities. Further, the goods are required to be delivered at the contracted place and the exporter should have to bear the expenses for that. Further, he has the liability to deliver good quality products to the buyer (McGovern 2018). The cargo insurance must be borne by the exporter. If the goods are damaged before the delivery, the exporter should be held responsible for this and before the delivery, the exporter will deal with the costs of the goods. The exporter should have to serve proper notice to the buyer regarding the delivery of the goods. He is also responsible for transmitting all the necessary electronic messages to the buyer.
Concurrently, buyer has certain responsibilities regarding the delivery of goods in international sale contract. According to Article 6 of CISG, the buyer should have to pay the contracting price to the exporter after the goods have been delivered in the contracted place. Further, it has been mentioned under Article 38 of CISG, it is the foremost responsibility of the buyer to check the quality and quantity of the goods when it will reach at the place. After the delivery of the goods, if any damage has been caused to the goods, buyer will be responsible for such consequence (Quinn and Alston 2017). However, no responsibility is there for the buyer in case of cargo insurance; but after the delivery, all the risks will be transferred to him and he will be held responsible for maintaining the quality and quantity of the goods. Further, buyer is required to serve receive notice to the exporter after the delivery.
Reference:
Baier, S.L., Bergstrand, J.H. and Feng, M., 2014. Economic integration agreements and the margins of international trade. Journal of International Economics, 93(2), pp.339-350.
Busse, J., 2014. Forfaiting: an alternative financing model to project finance for PPPs? (Doctoral dissertation).
Chataway, J., Banda, G., Cochrane, G. and Manville, C., 2016. Innovative procurement for health and industrial development. In Making Medicines in Africa (pp. 243-260). Palgrave Macmillan, London.
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university press.
Goh, K., 2017. Trading Places: Benefits of Invoice Finance for Small and Medium Sized Enterprises as Opposed to Bank Lending. Aberdeen Student L. Rev., 7, p.56.
Kim, H.S. and Jang, J.H., 2015. The problems for the usage and practical application of INCOTERMS 2010 in international trade contracts. Journal of the Korea Institute of Information and Communication Engineering, 19(12), pp.2993-3002.
Kim, J.S. and Park, S.H., 2015. Legal Issues in Forfaiting Transactions.
Lekkakos, S.D. and Serrano, A., 2016. Supply chain finance for small and medium sized enterprises: the case of reverse factoring. International Journal of Physical Distribution & Logistics Management, 46(4), pp.367-392.
Maggi, G., 2014. International trade agreements. In Handbook of international Economics (Vol. 4, pp. 317-390). Elsevier.
McGovern, E., 2018. International trade regulation (Vol. 2). Globefield Press.
Picciotto, S., 2017. Rights, responsibilities and regulation of international business. In Globalization and International Investment (pp. 177-198). Routledge.
Quinn, G. and Alston, P., 2017. The nature and scope of states parties’ obligations under the International Covenant on Economic, Social and Cultural Rights. In Economic, Social and Cultural Rights (pp. 3-76). Routledge.
Soyer, B. and Tettenborn, A. eds., 2016. International Trade and Carriage of Goods. CRC Press.
Tanrisever, F., Cetinay, H., Reindorp, M. and Fransoo, J., 2015. Reverse factoring for SME finance.
Todd, P., 2016. International trade and insolvency. In International Insolvency Law (pp. 69-86). Routledge.
Zhang, J. and Thomas, L.C., 2015. The effect of introducing economic variables into credit scorecards: an example from invoice discounting. Journal of Risk Model Validation, 9(1), pp.57-78.
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