Export Factoring Frees Companies from Hassles of Delayed Payment from Foreign Buyer

by India Factoring India Factoring and Finance Solutions Pvt.

Export factoring allows companies to obtain working capital by selling their foreign receivables also that minimize the risk of a foreign buyer not paying them. In export factoring, the companies sell their foreign receivables invoices to a factor (financial institution) for a fraction of their invoices' full value. The company on selling their foreign receivables immediately receives payment from the factor rather than waiting weeks or months for their foreign buyer to pay the full amount of the invoices owed to them. Thus, the factor not only expedites payments for their exports but also minimizes the risk of nonpayment from the foreign buyer. Once the factor buys foreign receivables from the company, the factor becomes the new recipient of the money owed by its foreign buyer. The risk of nonpayment shifts from the business' books to the factor, thereby eliminating the risk of not being paid for the business.

How does Export Factoring Work?

Companies dealing with foreign customers often have a lengthy payment process, thus export factoring is a way to release some of that money before clearing the invoices. The working process of export factoring is a few-step process because it deals with international transactions.

· In the initial stage, the company signs a contract to sell their export receivables to a factor

· The company exports goods to a foreign buyer on terms that are mutually decided. For example, a business may export goods worth $100,000 and allow foreign buyers 90 days to pay the invoice.

· The company sells the foreign receivables invoices to the factor that immediately pays a certain percentage of the amount owned by their foreign buyer. For example, the export factor may pay the business $90,000 for the $100,000 worth of receivables that their foreign buyer will pay them in 90 days.

Export Factoring Benefits

Export factoring not only allows the company to carry out trade on open account terms but also assists the company in a situation where they may be a risk of non-payment and short-term sales of products. It also simplifies credit and collection in case of international sales and expedites cash flows by providing liquidity in the business and assisting in credit risk mitigation. Some of the major benefits of export factoring include:

Risk Protection – Foreign Buyer default risk is covered under Export Factoring as factoring institution books all the factored invoices under insurance. Hence the company can spend their quality time into business development activities instead of monitoring buyer credit worthiness.

Smooth Cash Flow - Payment in export transaction doesn't happen fast as it is a lengthy process. Thus, slow payments increase the obstacle in cash flow that can be efficiently handled with the help of export factoring that offers quick access to cash flow.

Reduce Administrative Cost - Export factor while buying invoices from the business also take the responsibility of managing their accounts receivable. Thus, the company can save the resources that they would have engaged to manage those receivables.

Summary - Export factoring is a viable financial solution offered to business that export their products or services, as it allows them a better liquidity position, offer open account terms, and allows them to be competitive. It is also regarded as a better alternative to long-term bank loans, high-cost debt, and export credit insurance.