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Offshore Factoring

Offshore factoring is the acquiring of accounts receivables due to international business, or institution at a discounted interest rate.

The purchase price is discounted to allow for potential losses and also to allow for the fact that the finance company will not receive full payment until some time in the future. When evaluating a firm's accounts receivables, the emphasis is on the value of the receivables.

The three parties involved are the seller, debtor, and the factor. The seller (of the receivables) is owed money by the debtor. The seller is seeking to raise cash. The factor purchases the receivables from the seller. The factor collects the full value of the invoice from the debtor.

Some of the largest factoring firms are owned by commercial bank holding companies. Banks have substantial expertise in evaluating accounts receivable.

Offshore factoring presents a unique opportunity for international firms established in high tax jurisdictions. A factoring firm established in a low tax jurisdiction could achieve the transfer of funds from a from a high tax jurisdiction to a low tax jurisdiction.

"In developing countries, factoring offers several advantages over other types of lending. First, factoring may be particularly useful in countries with weak secured-lending laws, inefficient bankruptcy systems, and imperfect record of upholding seniority claims, because factored receivables are not part of the estate of a bankrupt small or medium enterprise. Second, in a factoring relationship the credit is primarily based on the quality of the underlying accounts, not on the quality of the borrower."¹

¹http://www.imf.org/external/pubs/ft/fsa/eng/pdf/ch06.pdf

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