Export factoring, also known as invoice financing or account receivable financing, is a technique in which a financial intermediary purchases a company’s receivables and advances cash to their business. This type of financing is different than a traditional bank loan for a few reasons. First, unlike bank loans, it does not show up on a company’s balance sheet as debt. Also, small to mid-sized businesses can more easily qualify for export factoring because this financial service often does not require collateral. Furthermore, the funding from export factoring is based on the creditworthiness of a company’s customers rather than the borrower’s own financials.
Receivables-based financing has unique benefits. The funding from export factoring is essentially the payment a customer owes you. However, instead of waiting for your customer to pay you – which in today’s business world can take up to four months — a financial intermediary accelerates cash flow to your company. Some international trade finance companies like Tradewind Finance can fund within 48 hours of invoice submissions. The cash a company receives is up to 90% of the invoice amount. The remaining 10% minus a fee is sent to the company after the full amount is paid by the customer upon invoice maturity.
In this respect, a business does not have to worry about how to “pay back” the factor that lends it money. The transfer of receivables from the business to the factoring company is more of an exchange than a dip in the scale on either party’s end. The customer is then charged with paying the bill directly to the factor on the invoice due date. The factor acts as an extension of the borrower’s back office and takes care of the collections process and bookkeeping.
By using export trade finance, a company can offer its customers longer payment terms. With added cash flow from this type of financing, a company has access to the capital it needs to carry out its business. Offering extended payment terms to buyers is crucial when a company wants to secure and expand its sales. The majority of international trade is conducted on open account payment terms, and export factoring makes it more feasible for companies to succeed in a trading climate where delayed payment is the new norm.
Not only is funding immediate, but export factoring also allows for an easy funding process. From the application to the account setup, this financing method removes the rigid requirements often found when seeking a bank loan. With less hoops to jump through, companies can get the liquidity they need to focus on their core business and growth goals.
Non-recourse export factoring offers another benefit to the borrower. In this type of financing, the financial intermediary who buys a company’s receivables also provides credit protection on those receivables. This credit-insured approach safeguards a borrower in case their customer defaults on their payment.
Though quicker payment and credit protection in and of themselves can help a company engage in trade more securely, cross-border business can introduce new rules, regulations and currency demands to navigate through. Companies that provide international factoring are equipped to guide exporters through local requirements and offer services like currency regulation control so they can seamlessly ship to buyers located in different spots around the globe.
There are also challenges that come into play with traditional financing that can be difficult to pivot around. Bank services can provide funds that are limited or exhaustible, but the funding from export factoring can grow as a company’s orders and invoices increase. Such scalable financing enables companies to commit to higher volumes of orders knowing they will have enough cash on hand to fill them while paying for other expenses involved in running a business.
Export factoring provides a full suite of trade finance benefits, including cash advances, credit protection, and collections services. A leading international trade finance company like Tradewind Finance offers export factoring packages that can help your business achieve growth and limit the trade risk in doing so.
