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Export Factoring

Introduction

Due to the increase in world trade competition, exporters are increasingly forced to provide flexible open account terms to overseas buyers. When domestic banks are not willing to finance your export receivables, International Export Factoring may be an alternative and possibly better solution. International traders are increasingly using factoring to finance their international short-term credit sales. According to the World Factoring Yearbook there were over 60 countries reporting a domestic and export factoring industry in the year 2003. The volume of factored/discounted receivables has been growing at a substantial rate.  From 1997 up to 2002 the world volume has increased by approximately 80%, and the trends would indicate continued growth in 2003.

International export factoring is the sale of your short-term foreign accounts receivable at a discount to a US based export factor company for immediate cash. The US Factor partners with a selected Overseas Factor company operating in your target market to assume the full credit risk of your overseas buyers. By selling your receivables to a factoring firm, you can receive most of your cash within days of your sale. The rest of your funds are received after the final collection from your buyer. International export factoring transactions differ from import factoring in that an additional factoring company – the Overseas Factor - is included in your financial services team.

Example

A California based technology company – we will call Delta - had sold for years to buyers around the world on letter of credit terms. Competition from manufacturers in Asia and Europe pushed the company to offer better terms to a number of key overseas buyers. The Company evaluated various options and decided on the use of an International Export Factor to finance its sales to buyers located in Thailand, Turkey and Germany. An experienced international factor was selected with solid relationships with Import Factors in the three target countries. Delta company signed a factoring agreement with the US Export Factor which assigned the Exporter’s accounts receivable to the US Export Factor. Under the terms of the agreement the exporter Delta is covered against credit losses up to 100 percent of the approved credit.

The US Export Factor signed agreements with the Import Factor Companies located in each of the three target countries to act on the Exporter’s behalf. Under the direction of the US Export Factor, each overseas Import Factor investigated the credit standing and established credit limits for each of Delta’s local customers and some potential customers targeted by Delta. Credit lines were quickly established to enable the Exporter’s foreign customers to place orders on open account trading terms. Once authorized sales take place, the seller becomes eligible for funding. The import factors located in each target country handles the local collection and payment of the accounts receivable. The Export Factor provides the exporter with timely information collected from each Import Factor on each transaction. All stages of each sale transaction is monitored. Reports document any issues or discrepancy that effected each transaction that could impact timely payment.

Today, the international factoring operation has been favorable with overseas sales steadily increasing in the counties where factoring was activated.

Prerequisites

Factoring Firms look primarily at the credit quality of the Account Receivables to be purchased and secondarily at the credit strength of the seller. In some instances, factors will work with start-up or young. However, they generally out companies with the following characteristics:

  • Organizations with a solid track record of profitable sales.
  • Management with a proven track record.
  • 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 overseas buyer may not have any rights to return or offset payment on the product.
  • Minimum size deals are $500,000 in factoring business a year.

Advantages of Factoring in General

  • Improves cash flow.
  • Eliminates bad debts.
  • Reduces operating expenses.
  • Expands working capital.
  • Strengthens balance sheet and enhances borrowing potential.
  • Improves management information.
  • Provides quick alternative source of financing.
  • Provides supplemental financing beyond what current lender may be able or willing to provide.
  • Funds business growth/expansion without increased bank debt or selling equity.
  • Provides immediate access to working capital.
  • Enables company to increases sales and profitability.
  • Preserves company’s existing lender arrangements.
  • Provides professional collection and credit checking support Removes or lessen the business costs associated with the collection process.
  • Provides complete and detailed reports about accounts receivable portfolio

Advantages To Exporter

  • Increase sales in foreign markets by offering competitive 'open account' terms of sale.
  • Obtains financing from the factor without recourse to the exporter.
  • Receives cash immediately upon delivery of the goods or services.
  • The factor bears the risks of buyer’s credit, currency and interest rate fluctuations.
  • Gains protection against credit losses from foreign sales.
  • Generates accelerated cash flow through faster international collections.
  • Obtains lower costs than the normal aggregate charges for L/C transactions.
  • Relieved of the process of collecting the money at maturity.
  • Avoids high cost of an international sales credit department.
  • Obtains on the appropriate terms and conditions to fit each export sale customer.
  • Check on the credit history and reputation of your overseas buyer.
  • Obtains advise on international trade documentation and shipping issues.

Disadvantages To Exporter

  • Cost: Export factoring can potentially cost more since two factor firms are involved.
  • The exporter has the responsibility to ensure that the debt instruments are validly prepared.
  • The exporter must insure that there are no disputes over product quality or performance.
  • Potential loss of control over customer relationship management.
  • Exporter may need to meet minimum factor volume levels

Cost of Factoring

The factor charges a "discount" or fee, usually between 2.5 and 4 percent of the invoices' 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 annual sales of a client.

The following are the factors 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.

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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