Export factoring is a technique in which a financial institution purchases a company's receivables and advances cash to their business. Learn more in the blog.
Businesses involved in foreign trade sometimes face challenges with their cash flow, which becomes a hassle in a company's finances. This shortage can impact daily operations and slow down an organization’s growth. To avoid this, many sellers turn to external sources of funding like export factoring to run their businesses smoothly.
What is export factoring?
Export factoring is the process where a lender or a factor buys a company’s receivables at a discount. It includes services like keeping track of accounts receivable from other countries, collecting and financing export working capital, and providing credit insurance. After making a deal with a business, a lender will usually offer 80% of the value of the deal. This lender is also risking not getting paid by an importer. Some of the factors required for a business in export factoring are: · The business has done well in the export market for a long time. · The business operates on an ‘open account’ basis. · The business wants to get rid of the risk that comes with export orders that are not paid1.
Current demand for export factoring
Cash credit and loans are not easy in the international financial sector. Due to this, many sellers are opting for export factoring. In India, export factoring is usually led by Non-Bank Financial Companies (NBFCs), which are mostly funded by financial institutions. The high interest rates that banks charge these NBFCs are passed on to the people who borrow money. Before investing in a company, investors or financiers often look into the company’s sales history. So, export businesses that have been around for a long time and have a good track record are the best candidates for export factoring2.
How does export factoring work?
The exporter makes a deal with a financial institution called a ‘factor’.
The exporter sends goods to international customers according to the terms that were agreed upon.
The exporter gives the factor an invoice for foreign receivables, and the factor pays the exporter a certain percentage of the amount.
The exporter uses some of the money to pay off bills that are still due and the rest to pay for the next export order.
Types of export factoring
In this case, the lender gives exporters money based on their receivables before getting paid by the importer. The rates on these funds change based on their discount rate and how long the term is.
By using this service, the exporter gets paid by the financier when receivables are due. So, there is no chance that the importer will not pay at the agreed-upon time.
Benefits of export factoring
Some of the common benefits of export factoring are:
Quick way of obtaining money
When an exporter sells accounts receivable to a factor, money is received right away. This upfront payment can help a business meet its immediate cash flow needs. With an instant infusion of capital, a business can run more smoothly.
Better money flow and more working capital
Export factoring is a must if you want a steady flow of cash. If a business gets a lot of money, it might use it to buy more supplies and thus, grow.
No repayment challenges
The financier will try to collect from the importer. So, the exporter does not have to worry about getting this payment and can focus on other parts of the business.
The risk of getting paid by the importer falls on the export factoring financier. If an importer stops making payments, the exporter will not have to pay for those costs.
With export factoring, a business can ease off the burden of payments and finances and gets the working capital it needs to run operations.
Easy e-commerce exports with Amazon Global Selling
With export factoring, a business can ease off the burden of payments and finances and gets the working capital it needs to run operations. Cash credit and loans are not easy in the international financial sector. Due to this, many sellers are opting for export factoring. In India, export factoring is usually led by Non-Bank Financial Companies (NBFCs), which are mostly funded by financial institutions.
What is the difference between export factoring and forfaiting?
When a company sells its accounts receivable to a factor, it is selling all of its invoices. When a company does forfaiting with an international trade financing company, it gives up all of its rights to the trade receivables that go with it.
How export factoring can help your business?
By using a factoring service, businesses can quickly get the money they need to grow. By factoring in your foreign receivables, you can get paid right away by the factor instead of waiting weeks or months for your importer to pay you.
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