“Import factoring” is a term that (in the US) can have many meanings and is often confused with purchase order financing. For this article, “import factoring” refers to financing invoices from clients outside the US that sell goods to US companies. It’s essentially the equivalent of providing foreign exporter factoring.
Unique value proposition
Most US factoring companies focus on working with domestic clients and finance only those invoices for which the payer is a US company. However, some foreign companies that sell goods to American companies are unable to get financing in their own countries. In some instances, those import invoices could be financed through factoring.
Improve your working capital
Using import factoring improves your company’s working capital by reducing your effective DSO (days sales outstanding). Much like a conventional transaction, the factor purchases your invoice — but in two installments: the advance and the rebate. The advance averages about 70% of the gross value of the invoice and is provided as soon as the product is delivered/accepted. The remaining 30%, less the fee, is rebated once your client pays their invoice on their usual terms.
Notifications and verifications
Like conventional US-based transactions, import factoring is not transparent to your customers. Your clients receive a standard notice of assignment, advising them of the relationship and the proper payment address for the invoice. Lastly, the invoice needs to be verified to ensure that the client received, and is satisfied with, your products.
Inherently riskier; thus, more expensive
Import factoring transactions are inherently riskier than conventional invoice financing transactions. Although the invoice is being paid by a US company, the client is foreign, which makes performing adequate due diligence more difficult. Ultimately, this complexity increases the risk and, consequently, the cost. Import financing can be used by companies with gross margins higher than 15%.
To qualify for this import financing, the client must meet these requirements:
- The client company must be located in Latin America or certain European countries
- The customer/s being invoiced must be a major US corporation
- The client must invoice at least $200,000 per month
- The client must have a proven track record in their business
Most import factoring transactions have the following structure:
- The client signs on after due diligence is performed
- The client sells products to a US company and submits invoice for financing
- The invoice is verified and the first installment is advanced.
- Once the US customer pays, the second installment is rebated (less fees)
One advantage of import factoring for clients is that it enables them to tap into a US source of funding familiar with US corporate credits. Aside from providing valuable funding, the financing company can provide credit expertise and help the foreign client determine how best to offer net-30 to net-60 terms to US clients, all while minimizing the impact on cash flow.
Get more information
We are a leading provider of import factoring. For more information, get an online quote or call (877) 300 3258.