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Article: Export Factoring – Financing International Sales

Note that is article only applies to companies based in the USA and in Canada. Selling goods internationally can open your company to a world of possibilities. However, if done incorrectly, it can also open your company to a world of challenges.

The US and Canada have well-established ways of doing business and ensuring contract and payment compliance. However, this is not always the case internationally. Consequently, working successfully with foreign customers can be an art as much as it is a science.

The problem with a letter of credit

Many international transactions are settled using letters of credit, which means you can rest assured that you will be paid on time as long as the letter is written properly and everyone meets the delivery/payment conditions.

However, using letters of credit can be time-consuming, and many foreign clients may, instead, insist on getting terms – especially if they are a large company. In this case, you may need ship the goods (or deliver your service) and then wait a number of weeks before you get paid. This payment delay can be difficult for small and growing companies that are just starting their international sales and can’t afford to wait that long for payment.

Is a business loan the solution? Not likely

One alternative is to ask a bank for a loan or line of credit. But getting bank financing is notoriously difficult. Most banks only provide financing to companies with a solid financial track record and substantial collateral. Few small companies can meet this criteria, which puts bank financing out of reach for many business owners.

Export factoring: A better solution

One way to improve your cash flow is to consider factoring, a form of invoice financing. This program finances your open invoices from quality foreign commercial clients.

Factoring improves your cash flow and provides the funds you need to run your company. Export factoring, as this form of international financing is known, can be a very useful tool for new and growing businesses.

How does an export factoring transaction work?

The transaction uses a financial intermediary to finance your export receivables. They hold the receivable as collateral, while you get immediate funds for your company. The transaction includes two installments: the initial advance and the rebate.

The advance covers about 80% of your invoice and is wired to your account as soon as your client accepts the invoice – usually when you deliver your product or service. The factoring company uses the remaining 20% to cover any potential invoice disputes, charge backs, or issues. Once your customer pays the invoice in full, your company gets the rebate of the 20% that was not initially advanced, less the fee.

Credit challenges and insurance

Financing an international receivable is more challenging than domestic factoring. There are three major “obstacles” that must be overcome:

  • Credit evaluations – Performing a credit evaluation on a foreign company is difficult unless the company is located in a major country. As a result, most export financing companies only provide services in certain countries – and only in those with stable governments.
  • Customer notifications – Most international invoice financing companies want to notify your customer to provide them with payment instructions. While this notice provides some protections when transactions are based in the US or in Canada, they provide few protections in other countries. This drawback increases the risk of the transaction dramatically.
  • Communications – Communication with your customer pay be problematic due to time zone difficulties, language challenges, and cultural differences.

Important details

One important point: financing invoices does not provide credit protection. So if your foreign customer does not pay, your company must return the advance and make the finance company whole. Many people confuse factoring with credit insurance – don’t make that critical mistake. Some factoring companies can use their

own credit insurance to cover your transaction – or you may have to get your own. Be sure to ask.

As you can imagine, these challenges increase the risk of the transaction to the factor. Because of this risk, few companies offer this service. And those that do often charge a higher rate to compensate them for the risk. If you need an export factoring quote, please use this form.

You can learn more about export factoring by reading this business case.

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