How to Finance a US Subsidiary (A/R Financing)

For overseas entrepreneurs, opening a foreign subsidiary of your company in the United States presents both a great challenge and a fantastic opportunity. The American market offers great potential for expansion and the opportunity to grow sales.

However, you often need to make a large investment to open a foreign subsidiary. Obviously, you need funds to get the subsidiary started. But that’s the simple part. You need to make ongoing cash contributions to manage operations, especially if the business is gaining traction.

This point is where many companies encounter problems. They miscalculate how much working capital they need to get a business established. They often try to fix this problem with financing.

Getting working capital is a major challenge

Getting financing is a major obstacle for both the overseas parent company and for its US subsidiary. The parent company may not be able to get funding because local banks and finance companies don’t feel comfortable financing foreign operations (which can be risky). Or, the home country may not have the right financing solutions to help the company.

Alternatively, getting direct financing for a subsidiary of a foreign company is a major challenge as well. Most US-based lending institutions have complex qualification criteria that make it difficult for the new subsidiary to qualify. It is even more difficult to get working capital financing if your US subsidiary has no local personnel and is operated solely from overseas.

What is the biggest working capital problem?

Most commercial sales in the US are done on net-30 to net-60 day terms. Under these terms, your company has to deliver its products or services and then wait up to 60 days to collect payment. While your company waits for payment, you still have to pay for your own expenses. This practice is common in countries that have established credit services.

As you can imagine, it’s very difficult to operate a new, growing business under these conditions. It places a heavy cash burden on the parent company – often for years.

One option can help. If your US subsidiary has cash flow problems because clients are paying in 30 to 60 days, you could use invoice factoring.

Factoring improves cash flow

Factoring is a financing solution that we offer to the US subsidiaries of companies that are based in select countries. It helps companies with cash flow problems that stem from having to offer sales terms to their clients.

This type of financing enables you to offer credit to your clients while closing the months-long gap between issuing an invoice and receiving a payment. Factoring improves your cash flow, enabling you to operate the business and meet your obligations. More importantly, it provides a solid platform to grow the company.

For more information about factoring, read “What is factoring?

How does factoring work?

Factoring transactions are relatively simple. The factoring company purchases your accounts receivable (invoices) in two installments. The first installment covers around 80% of the invoice and is provided as soon as you send the invoice to your client. The remaining 20%, less a fee, is rebated once your client pays in full when the invoice matures. Transactions usually proceed as follows:

  1. Your US subsidiary submits an invoice for financing
  2. Factoring company verifies the invoice
  3. First installment is wired to your bank account (around 80%)
  4. Your customer pays after 30 to 60 days
  5. Factoring company settles transaction
  6. Second installment is wired to your bank account (20%, less fees)

For detailed information about this solution, read “How factoring works“.

Benefits

Invoice factoring (also known as accounts receivable factoring) can offer your subsidiary a number of advantages, including:

  • Improves your cash flow
  • Enables you to offer credit
  • Improves your collections
  • Easy to obtain
  • Can be deployed quickly
  • The line is flexible and grows with your sales
  • Helps minimize bad debt

Which companies qualify?

Accounts receivable factoring can be used by companies that sell products or services to commercial clients (or the US Government) on credit terms. It is important that your client is commercially creditworthy. In fact, the whole transaction depends on it, since invoices are the main collateral for the transaction.

Additionally, any work related to the invoice must be completed before it can be factored. Any products must be delivered and accepted. Lastly, factoring cannot be used in transactions made on consignment or where your customer can return unsold product.

Which countries qualify?

We can provide accounts receivable factoring only if the foreign company headquarters and the owners are based in certain countries. At this time, your headquarters and ownership must be located in:

  • UK
  • Australia
  • Canada
  • New Zealand
  • Germany
  • France
  • Spain
  • Italy
  • Portugal
  • Switzerland
  • Netherlands
  • Iceland
  • Sweden
  • Denmark
  • Norway
  • Other countries in Europe on a case-by-case basis

Which countries do not qualify?

At this time, we cannot provide financing to the subsidiaries of companies headquartered in Africa, Asia, and South America.

Do you need factoring?

We are a leading provider of factoring in the US and Canada. Get an instant quote to learn the costs. Use the “business description” area to indicate that you are looking to finance a subsidiary.