"Profit is an opinion. Cash is a fact."
In steel trading, you often have to give credit terms (T/T 90 days, OA 60 days) to big buyers like Samsung or Toyota.
It looks good on paper, but your bank account is empty for 3 months. You cannot buy the next cargo.
This is where Factoring saves you. It turns your "Paper Money" (Invoice) into "Real Money" immediately.
1. The Mechanism: How to Sell Your Invoice
Factoring is not a loan. It is the sale of an asset. You are selling your right to collect money to a financial institution (The Factor).
💸 The Process
- Shipment: You ship the steel and issue an Invoice for $100,000 (Due in 90 days).
- Assignment: You send this Invoice to the Factor (Bank).
- Advance: The Factor pays you 80~90% immediately (e.g., $80,000). You can use this cash today.
- Collection: After 90 days, your Buyer pays the full $100,000 to the Factor.
- Settlement: The Factor pays you the remaining balance minus their Fee (Interest + Service Charge).
2. The Critical Risk: Recourse vs. Non-Recourse
This is the most important clause in the contract. If you choose wrong, you could go bankrupt.
| Type | Who Takes the Risk? |
| Recourse Factoring (With Recourse) |
You (Seller). If the Buyer goes bankrupt and doesn't pay, the Factor will ask YOU to pay back the $80,000 advance. Cheaper fees, but high risk. |
| Non-Recourse Factoring (Without Recourse) |
The Factor (Bank). If the Buyer defaults, it is the Bank's problem, not yours. You keep the cash. Expensive fees, but acts like Credit Insurance. |
3. When to Use Factoring?
Factoring is expensive (usually LIBOR + 2~4%). Don't use it for every deal.
- Use it when: You have a huge order from a blue-chip company (e.g., Hyundai, GE) but you lack working capital to buy raw materials for the next order.
- Don't use it when: Your profit margin is thin (< 3%). The factoring fees will eat up all your profit.
Expert Verdict: Speed Costs Money
Factoring buys you Speed.
In trading, turning your capital over 4 times a year instead of 2 times means double the profit.
Pay the fee, get the cash, and move to the next deal.
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