Export Factoring Guide for Import and Export Businesses

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 international factoring volume that importers typically demand. Without proper cash flow management, export businesses may experience trouble doing business continuously. Export factoring can be a useful tool for solving many of the inherent cash flow bottlenecks involved with exporting.

What is Export Invoice Factoring?

Exports invoice factoring, also known as international factoring, is a type of cash flow financing solution in which a company (called the factor or factoring company) purchases your outstanding invoices or foreign accounts receivables for cash at a discount. Export factoring/ international factoring services provides fast and flexible access to steady working capital by removing the lengthy time frame it takes for importers to make payments. International factoring businesses are a great alternative to bank loans, bank financing and other types of financing that create a high cost of debt.

Benefits of Export Factoring

Ongoing cash flow: Exporting involves a lengthy process, and it usually means payments don’t happen fast. And slow payments heightens the chances for cash flow bottlenecks. Export factoring offers quick access to cash flow — as soon as you have the complete shipping documents. This allows you to turn cash over quickly and potentially earn more income.

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. Companies can also have the option to work with a non-recourse export factoring company that absorbs the risk of nonpayment. However, they are generally more expensive and require higher credit ratings and monthly minimum fees. 

Lower administrative cost: When a factor buys your invoices, they also take on the responsibility of managing your accounts receivable. That saves an exporter the resources they would have committed to managing those receivables.

Types of Export Factoring

There are four types of export factoring services. They include:

  • Two-factor export factoring: This factoring system involves four parties — the exporter, the importer, the export factor (based in the exporter’s country profile) and the import factor (based in the importer’s country). It’s called two-factor factoring because the export and import factors share the factoring responsibilities. Here’s how it works:
    1. The exporter receives a purchase order and submits the importer information to the export factor for approval.
    2. The export factor asks the import factor to review the importer’s creditworthiness and determine a credit limit.
    3. The exporter ships the purchased merchandise to the importer and sends the shipping information to the export factor.
    4. The export factor reviews the information and advances the exporter a certain percentage of the unpaid invoice amount.
    5. The import factor collects the payment from the importer. It transfers the amount to the export factor, who then removes the advance amount and  factoring fee before sending the balance to the exporter.
  •  Single-factor export factoring: Unlike in the two-factor system above, where the export and import factors share the responsibilities, only one factor (usually the export factor) performs all the functions in a single factor system. However, the other factor may be required to step in the event that the active factor couldn’t complete payment collection 60 days after the invoice is due.

 

  • Direct export factoring: This system involves only three parties — the exporter, importer and export factor. In essence, the export factor takes on the entire factoring responsibility — including importer’s credit assessment, cash advance to the exporter and payment collection services.

 

  • Direct import factoring: In this system, the exporter elects to work with a factoring company in the importer’s country. This means that the foreign factor is responsible for assessing the importer’s creditworthiness, extending the exporter a cash advance and collecting payment from the importer.

 

What is International Factoring?

International factoring is only another term for export factoring. Foreign accounts factoring is another term used instead of export factoring.

How Invoice Factoring Helps to Businesses Compete Internationally

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 unreliable cash flow/working capital. Invoice factoring brings cash flow predictability.

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.

How Do I Choose an Export Factoring Company?

Here are the five of the most important things to consider when selecting an export factoring company.

The Factor’s Experience: Since export factoring involves international trade, it’s somewhat more intricate relative to factoring in other industries. It could be advantageous to work with a factor with speciality in export factoring and export financing. In addition, depending on the factoring company, you can have online portal access to the transparent funding process. 

Speed and efficiency: A large portion of export factoring still happen offline with a lot of inefficiencies, which may sometimes lead to higher fees. However, technology-enabled factoring companies like FundThrough make the factoring process more efficient and speedier. 

Fee transparency: As you would expect, the faster access to capital that factoring offers has its extra cost. All factors charge a funding fee that could range from 1% to 5% per month. Other transaction costs may apply depending on the factor. You’ll want to know every detail related to fees upfront to be sure that you’ll still have a healthy margin after selling your invoice. 

Thanks to its innovative technology, FundThrough offers an affordable solution with some of the best and transparent fee structures for exporters.

Advance rate: This refers to the percentage of the invoice amount that the factor is willing to give you upfront. Higher percentages are generally desirable — since it means you’ll get more cash. With FundThrough, you may qualify to receive the entire invoice value, less the factoring fee, upfront.

Look at the fine prints: As with any financing activity, you’ll need to agree to certain legal terms. Take some time to review legal documents with your lawyer before working with any factor.

Export Invoice Factoring FAQs

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.

Simple. Intuitive. Export Invoice Factoring.

Built For Your Business.