A Quick Guide To Invoice Financing And Export Factoring

Export factoring, also known as international factoring, is a financial service that helps companies that engage in international trade manage their cash flow and reduce the risk associated with selling goods or services to foreign debtors.

It involves a specialised financial institution, often called a factoring company, purchasing the accounts receivable (unpaid invoices) of an exporter at a discount and taking responsibility for collecting payment from the foreign buyer.

Here’s how factoring typically works:

1. Exporter’s Agreement: The exporter (seller) and the export factoring company enter into an agreement. The exporter provides goods or services to a foreign debtor and issues an invoice.
2. Invoice Submission: The exporter submits the invoice to the export factoring company. This may be in the exporter’s country or have an international presence.
3. Advance Payment: The factoring company advances a percentage of the invoice’s value (usually around 70-90%) to the exporter, providing immediate cash flow to the exporter. This advance can help cover the costs of production, shipping, and other expenses.
4. Credit Protection: The factoring company may also provide credit protection, which means it assumes the credit risk for the foreign customer. If the customer fails to pay due to insolvency or other reasons, the factoring company bears the loss.
5. Debt Collection: The factoring company takes responsibility for collecting payment from the foreign customer. They have experience dealing with international collections and can navigate language barriers and local regulations.
6. Remaining Payment: Once the customer pays the full invoice amount, the factoring company deducts its fees and the advanced amount, and the remaining funds are remitted to the exporter.

Export factoring offers several advantages to exporters:

• Improved Cash Flow: Exporters receive an immediate cash advance, which can be crucial for covering expenses or investing in growth.
• Reduced Credit Risk: The factoring company assumes the risk of non-payment, protecting the exporter from bad debts.
• Collections Expertise: Export factoring companies are often experienced in international collections, which can be complex and challenging.
• Financing Growth: Using this type of funding can support a company’s expansion into new international markets.

However, it’s important to note that export factoring comes with fees, which can affect the exporter’s profitability. Exporters should carefully evaluate the cost versus the benefits to determine if this financing option is right for their business.

A Quick Guide To Invoice Financing And Export Factoring