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What you’ll learn in this guide:
Cash flow is important to all businesses, but international or cross-border trade demands a faster cash flow than most. First, the entire export process can be lengthy, which means a longer wait time for payments. Add that to the flexible and extensive credit terms and that importers typically demand, and you have constant cash flow gaps. Without proper cash flow management, export businesses may experience trouble keeping business going. And having the funding to grow can seem out of reach. Export factoring is a useful tool for solving everyday needs for cash – like payroll – and getting funds to go after large projects that will grow your exporting business.
Exports invoice factoring, also known as international factoring, is a type of cash flow financing solution. A factoring company gives you cash for your outstanding invoices or foreign accounts receivables, less a fee, in days. You put your funding to work, and the factoring company waits on your customer to pay. Export factoring, or international factoring services, provide fast and flexible access to steady working capital by eliminating the need to wait on net terms for importers to pay. International factoring businesses are a quicker, easier alternative to bank loans, bank financing and other types of financing that create debt, dilution, or will take months for approval. It’s also common for banks to reject growing companies that are too new; export factoring is often the perfect solution.
Quick cash flow: Exporting takes time, often slowing down payments. And slow payments can leave you in a cash flow crunch. Export factoring enables you to unlock funds stuck in accounts receivable in days.
Flexible funding: You can fund an invoice any time and get working capital in days. It’s an easy solution for when you need a short-term funding boost to bid on a big contract or make payroll while your receivables are outstanding.
Growth capital on demand: Get funding any time to take on big contracts that will grow your business. No need to turn down large deals or additional customers only because you can’t afford more raw materials, labor, or equipment.
Avoid bank hassles: Bank financing – loans or lines of credit – are funding options worth considering. However, many banks have steep qualification criteria, and if you’re company is less than a few years old, they will likely reject you. And there’s the wait: even if you already have a line of credit, raising the limit can still take months of waiting.
Unlimited funding: This isn’t true for all factoring companies, but FundThrough offers unlimited funding for as much capital as you have invoices for.
Risk protection: Factoring allows an exporter to transfer certain risks to the factors. Some of the risks include transaction risk such as exchange rate risk, interest rate risk, and even political risk.
However, factoring companies generally cannot protect you from credit risk (risk of nonpayment). If companies want to be protected while working with a factoring company, they should opt for trade credit insurance/export credit insurance. Working with a non-recourse factoring company that absorbs the risk of nonpayment is an option. However, they are generally more expensive and require higher credit ratings and monthly minimum fees.
Lower administrative cost: When a factoring company buys your invoices, they also take on the responsibility of managing your accounts receivable. That saves you time and resources you can put toward managing and growing your business
There are four types of export factoring services. They include:
International factoring, also known as foreign accounts factoring and international invoice financing, is when a company who is exporting goods internationally gets cash for their outstanding invoices. The only difference between it and general factoring for the industry is the selling of goods to countries outside of the exporter’s.
Exporting is a time-intensive business, and that can lead to slow cash flow. Slow cash flow, in turn, has a high opportunity cost i.e., deals or trades lost due to a lack of working capital. Invoice factoring brings cash flow predictability, especially if you have the potential for large international factoring volume.
It also adds a few less obvious advantages: international factoring enables exporters to offer flexible payment terms to customers around the world. It also eliminates the headache of exchanging foreign currencies.
Also, since factoring allows exporters to worry less about short-term cash flow, they expand their customer base by offering flexible credit terms. That could be a competitive advantage over the long-haul.
Here are the five of the most important things to consider:
Industry Experience: If a factoring company has already funded exporters in the past, working with you will be easier. They will know the intricate ins and outs, saving you the hassle of having to explain multiple details specific to export transactions.
Speed and efficiency: Many factoring companies still use manual, paper-based processes, leading to a slow and expensive process. Look for a company that uses technology and automation to save yourself time and effort in getting funded. That’s what invoice factoring is supposed to deliver in the first place.
Fee transparency: All factoring companies charge a funding fee that could range from 1% to 5% per 30 days. But they don’t all tell you about hidden fees – like service fees, sign-up fees, or annual fees – that can leave you with less of your invoice than you thought. See FundThrough’s pricing here.
Advance rate: This refers to the percentage of the invoice amount that the factor is willing to give you upfront. Many factoring companies only have advance rates of 80%. With FundThrough, you get the entire invoice value, less the factoring fee, upfront.
Partner in your success: This should be a given, but it’s often not. Whoever you choose should be invested in your long-term success. At FundThrough, that means finding solutions to help you get funded, dedicated account management, and treating your customer like our own.
The definition of export invoice financing varies: it can be another term for export invoice factoring, or it can mean getting paid for an invoice upfront while you pay a factoring company back yourself over a period of weeks or months. The benefits of export invoice financing are the same as those of factoring: fast, flexible cash flow without debt or dilution of ownership. Here are the basic qualifications for invoice factoring with FundThrough:
If you meet all requirements above, see if you’re qualified now.
Your questions answered.
No, factoring is not a loan and therefore doesn’t appear on your balance sheet as debt. Factoring is essentially the sale of an invoice or accounts receivable to another company for immediate cash.
Factoring, also called invoice factoring, is when a domestic company receives an advance, usually 80%, against unpaid short-term accounts receivables.
Factoring and pledging are both financing options based on your accounts receivable (outstanding invoices). However, pledging doesn’t absolve you of the responsibility to collect payments. Factoring companies on the other hand, commit resources to collecting payments on your behalf.
The difference between factoring and reverse factoring lies in who initiates the invoice factoring. In traditional factoring, the seller initiates the accounts receivable financing. In reverse factoring, which is less popular, the buyer initiates the factoring process as a way to help suppliers get paid earlier. The supplier (seller) bears the associated cost with reverse factoring — as with conventional factoring.
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