Here the seller is paid by the factor in advance (before the average due date) and receives an amount based on the invoiced amount less an allowance for credit losses. In turn the factor is paid interest on average balances some way above that paid on loans made to companies of a similar credit standing.
This is the risk that the government of the importing country will introduce measures, such as the introduction of capital controls, to prevent money leaving the country and hence from allowing the buyer to pay the exporter.
An importer faces the risk of non-delivery if they make payment in advance. Banks step in to break this impasse by providing guarantees of payment to exporters when the goods are delivered to the buyer.
The most basic and common form of this guarantee is the “letter of credit”, commonly referred to as an L /C. This is a highly standardized contract and is internationally recognized. It is treated as a contingent liability by the issuing bank as payment is conditional on a number of conditions being met.