Korean Plastics Company: Factoring Export Receivables
This case deals with the use of factoring in international trade to improve a company's liquidity position and reduce its exposure to payment risk. Korean Plastics Company (KPC) is a large company that supplies products globally, including many developing countries. The company is facing a serious liquidity problem that has been caused largely by a slowing of its accounts receivable collections, specifically from developing countries. The CFO of the company is considering the use of factoring as a means of mitigating this risk and improving cash flow for the company.
Taeho had set up an appointment with KPC's banker who confirmed that they could do factoring for KPC. He hoped that by the end of the week he could make a decision about what action he should take. Would factoring be the correct action for him to pursue for KPC? Are there other alternatives that KPC should review in order to be able to determine if the discount was acceptable or too high? Identify some alternatives and compare costs.
The case is useful for gaining an understanding of methods of improving cash flow management while at the same time mitigating international payments risks. It is designed to illustrate the benefits and costs associated with using factoring techniques to accelerate payment on trade receivables. It is also useful to gain comparative information on the techniques available to sell international receivables.