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Accounts Receivable Factoring for Importers

Introduction

In North America , the largest corporate buyers require that their suppliers provide extended payment terms of sale. In most cases there is little room for negotiation. If you want their business you are forced to finance your corporate and government buyer for 30 days, 60 days and longer periods of time. Smaller importer/Distributor suppliers can be particularly impacted because they are less likely to obtain extended credit terms from their overseas suppliers. The timing differences between cash intake and cash outflow is the basis of cash flow problems endemic in the small business community. The cash flow "crunch" can be seriously exacerbated during economic downturns when corporate buyers commonly "stretch" their accounts payables.

A good solution for this inevitable cashflow dilemma is for Importer/Distributors to use a financial tool called import factoring. The market for factoring in the United States has been growing over the years. According to the Commercial Finance Association, domestic factoring reached over $96 billion in the year 2003, making factoring the country's single largest method of funding credit sales. The financing tool can be particularly effective for international traders that import large shipments of goods. When an importer sells product under extended short-term credit terms to a substantial creditworthy North American buyer, import factoring becomes a real option. The extended credit term sale creates an account receivable that may be sold to an Import Factor at a discount for immediate cash. There are many companies that perform factoring services in North America . Only a select few have the required skills and abilities to navigate the complexities of Import Factoring.

Example

Webb Tile Supply is a rapidly growing California importer and distributor of mosaic tile. With the spring remodeling season arriving, the company received orders from two major buyers totaling $724,000 in sales. Each buyer wanted 60-day open account terms.

Webb Tile Company's supplier in Sri Lanka required a Letter of Credit for the tile order in the amount of $428,000. The supplier needed the L/C in order to get pre-export financing from their local bank.

As a result of rapid growth, Webb Tile Supply was reaching the limits of its bank credit line. The company had enough working capital to open the Letter of Credit but did not have sufficient credit to handle the extended credit terms of 60 days for each of the new buyers.

After consulting with TEFO , Webb Tile Supply decided that Factoring would provide quick access to the required capital and selected an experienced Import Trade Factor. After 5 days of intensive due diligence, the Factor agreed to the deal. The transaction proceeded as follows:

  • Webb Tile Supply asked its bank to open a sight draft Letter of Credit (L/C) in the amount of $428,000 in favor of the Sri Lanka Supplier.
  • The bank issued its letter of credit in favor of the Supplier in Sri Lanka .
  • The Supplier in Sri Lanka shipped the tile product by cargo ship to Webb Tile Supply.
  • The bank received the documents from the Supplier and negotiated the Letter of Credit paying off the Supplier.
  • The cargo ship with the container of tile arrived at Oakland Sea Terminal in California
  • The Factor advanced funds to Webb Tile Supply to pay the freight bills and import duties.
  • Webb Tile Supply arranged with a Customs House Broker for the importation of the tiles.
  • The tiles were delivered to Webb Tile Supply's warehouse and held there, subject to the Factor's control.
  • Webb Tile Supply arranged for the delivery of the tile to the two new customers.
  • Upon delivery and acceptance, Webb Tile Supply issued an invoice to each Buyer and sent a copy to the factor.
  • The Factor advanced 80% of the invoice amounts to Webb Tile holding back a 20% Reserve.
  • The Factor held a general lien and trust receipts covering the purchased goods from the time the bills of lading was released to the Webb Tile Supply until the goods were sold.
  • The new customers made their payments directly to the Factor's lock box.
  • Upon receipt of the payment the Factor remitted to Webb the difference (reserve) between the collected amount and the advance, less discount fee.

Import Factoring Services

  • Assists with your import process
  • Checks on the credit history of North American buyers and prospective customers.
  • Advises on the appropriate terms of sale for buyers.
  • Arranges for open credit to be extended to the buyer.
  • Under non-recourse contract assumes the credit risk for the purchased accounts.
  • Provides complete and detailed reports about accounts receivable portfolio.
  • Provides professional collection and credit monitoring support.

Prerequisites

  • Available to companies with a good history of operations.
  • Management with a proven track record.
  • History of selling to other creditworthy businesses.
  • The product or service must have been delivered and accepted.
  • The factor must be able to obtain a priority collateral position on the financed receivables.
  • The buyer may not have any rights to return or offset payment on the product or service.

Advantages for Importer

  • The importer can offer open account short-term credit terms to their buyers
  • Factors look first at the credit worthiness of the Account Receivables to be purchased, and second at the credit history of the applicant.
  • Some Factors will work with start-up or young companies.
  • Injects working capital and improves cash flow.
  • Eliminates bad debt risk under non-recourse contract.
  • Reduces operating expenses.
  • Strengthens balance sheet and enhances borrowing potential.
  • Improves management information.
  • Provides a quick, alternative source of financing.
  • Provides supplemental financing beyond what a current commercial lender may be willing to provide.
  • Funds business growth/expansion without increased bank debt or selling equity.
  • Enables a company to increases sales and profitability.
  • Preserves company's existing lender arrangements.
  • Decreases the business costs associated with the credit and collection process.
  • Increases purchasing power without utilizing existing bank lines of credit.
  • Can make quicker, smaller, "Just-in-Time" purchases

Disadvantages for Importer  

  • Higher than traditional bank financing costs means higher product prices.
  • Importer must insure that there are no disputes with buyers over product quality or performance.
  • Potential loss of control over customer relationship management.
  • Some of Importer's buyers may not appreciate additional parties involved with their business dealings

Factoring vs. Bank Loan

  • Factoring provides funds to a company based on the total qualified accounts receivable, rather than on traditional bank measures of financial strength and stability.
  • Factoring provides continuing cash flow without the common bank loan requirement of periodic payments or interim payoffs.
  • By Factoring funds can continuously be generated by new sales.
  • By Factoring a business does not have to deal with renewal of loans or worry about loan maturity dates.
  • Factoring gives a business increased access to cash as sales and receivables increase.
  • Unlike bank loans there is no ceiling beyond which a Factor must stop providing cash.
  • Contrary to bank loans Factors do not concentrate on the business's debt/equity ratios and historical cash flow.
  • Factoring offers a dependable and continuing source of cash without the need of separate loans applications.
  • Factoring saves businesses precious time waiting for bank loan committees to grant or deny a loan.
  • As opposed to Banks, Factoring credit decisions are straightforward and quick.
  • The credit decisions of Bank Loan committees are influenced by many considerations and the outcome is often unpredictable.
  • With Factoring the periodic delays and negotiations of bank loan processes are eliminated.

Cost of Factoring

Most factors charge a discount or commission, usually between 2.5 and 4 percent of the invoice value. The cost of factoring can be compared to the discount rate many corporations offer their credit customers to entice them to pay C.O.D. The average factoring commission is less than one percent of the company's annual credit sales.

The following factors are normally considered in determining rates:

  • Total dollar amount of factored invoices.
  • Average invoice dollar amount.
  • Invoice turn (anticipated average) and Invoice turn (actual).
  • Credit worthiness of customer base.
  • Length of factoring contract.
  • Minimum commitment of invoices to be factored.
  • Advance percentage (contractual) and Advance percentage (actual).
  • Reserve percentage (contractual) and Reserve percentage (actual).
  • Ratio of factored to non-factored invoices upon which we have a first lien.
  • Existence or non-existence of collateral in addition to accounts receivable.
  • Financial condition of client, and guarantor(s).
  • Historical dilution (non-payment of invoices in the amount billed due to claims, disputes, adjustments, etc.) and Actual dilution.

Application Process

  • The Factor accepts an online application.
  • The Factor reviews the application.
  • If approved, the Factor will forward legal documentation for approval and signature.
  • The Company provides a listing of accounts to be factored.
  • The Factor conducts due diligence which should take less than 10 working days.
    • Review of company background
    • Searches for UCC liens, tax liens, judgment liens, etc.
    • Evaluates credit of companies to be factored
  • When the review is satisfactory and complete, funding can begin on approved buyers.

Obtain Import Factor Financing

Fill out our brief online form and a TEFO Trade Finance Specialist will contact you to discuss your international trade finance needs.

Copyright © 2004, 2005 Ted S. Eastman. None of the contents of this article may be reproduced or republished without the express permission of the author

 

 

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