How To Finance Foreign Receivables

Offering payment terms to foreign clients for your export sales can be a challenge. While many export transactions can be done safely using a letter of credit, large foreign companies often demand payment terms. In a conventional credit sale, the US supplier delivers the product or service to the foreign client and then waits up to 60 days for payment. This arrangement creates a problem for US-based companies by exposing them to a number of risks. As a business owner, you need to strike a balance between managing these risks and reaping the rewards of growing your company internationally.

Risks of providing credit to foreign clients

The most common risks of providing credit to export clients are currency risk, credit risk (non-payment) and cash flow risk.

  • Currency risk: This risk is that the currency in which your client pays you decreases in value between the time you issue an invoice and when it is paid. While this risk is not significant if you are dealing with strong, stable currencies, payments in volatile currencies can affect your profitability – often dramatically.
  • Credit risk: This risk is that your client is unable or unwilling to pay your invoice when it is due. This risk increases for export transactions because there is limited information on the credit standing of foreign companies. Additionally, because your collections rights and remedies vary by country, handling non-payments can become a major issue and expense.
  • Cash flow risk: This risk is that you won’t be able to meet your current obligations – such as paying suppliers – because your client is taking 30 to 60 days to pay an invoice. This risk often affects companies without large cash reserves or access to a line of credit.

Hedging financial risk in export transactions

The best way to reduce your currency fluctuation risk is to insist that all clients pay you in US dollars. However, this option is not always possible, as customers may have their own currency limitations.

If US dollar payments are not available, you can still reduce the effects of currency risk in your export transactions by using hedging tools, such as forward contracts or call/put options. You can protect yourself against the rise (or fall) of a currency by using these financial instruments. Such protection, however, comes at a cost that reduces profitability. Given the complexity of hedging currency risk using derivatives and futures, you should do so only under the guidance of an expert, as transactions carry risk.

Minimizing credit risk

The best way to protect yourself against credit risk is to thoroughly evaluate your client’s credit before making a sale. Of the few companies that provide international credit reports, one of the best known is Dun and Bradstreet.

Additionally, consider credit insurance that offers international coverage. The official export credit agency of the US, the EXIM Bank, offers a great plan. However, these policies have some limitations, as they are intended to protect products of US origin. If your product does not meet the EXIM bank’s requirements, consider insurance from a private provider.

Minimizing cash flow risk

One way to minimize your cash flow risk is to finance your export invoices through an asset-based line or a receivables factoring program. These programs offer an important benefit. Instead of waiting up to 90 days to get paid by your foreign client, you can finance the invoice and get a substantial portion of the receivable upfront.

The few factoring companies that provide international invoice financing often provide credit evaluation services to help you determine the credit risk of a foreign client. This service can be a great help if you are not comfortable examining the credit profile of foreign companies. Furthermore, most factors also carry a comprehensive credit insurance policy which helps cover receivables in case of non-payment.

To learn more about how we can help you with export factoring, review this business case.

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