What Is Export Factoring?
Wouldn’t life be easier if you could expand your Invoice Factoring solution to cover overseas invoices?
Well you’re in luck!
Export Factoring is the answer to your risky, slow-paying invoices to international buyers. It is easily integratable with your current domestic Invoice Factoring facility, and provides a new source of funding for your business.
But there are some things you need to know before you sign up with a provider and begin using Export Factoring.
This article has the lowdown on all you need to know about Export Factoring. It is a useful guide that explains how Export Factoring works, what costs are involved, how contracts are structured, and whether your business is suitable.
So, let’s get right into it.
Export Factoring allows businesses that trade overseas to release cash tied up in domestic and international invoices. Most providers offer Export Factoring as part of your ongoing Invoice Factoring facility, as it gives you the option to additionally factor your foreign invoices, which essentially increases your sources of funding.
Besides providing a working capital injection for your business, Export Factoring also offers credit protection, foreign accounts receivable management, and international collection services. These additional functions reduce the risk of non-payment or slow payment when dealing with overseas clients, which is undeniably a huge bonus if you often waste time and resources chasing down payments from your foreign clients.
Let’s go over some Export Factoring figures.
From June 2016 and June 2017, Export Factoring actually rose by a whopping 11%, and produced £652 million in sales. Its rise in popularity in the UK is a result of more businesses seeing Export Factoring as a way to help ongoing export activities and assist in foreign expansion into new markets.
Want to find out more about Export Factoring, the benefits for your business, and whether you are suitable?
Keep on reading and you will find everything you need to know.
Before you even consider using Export Factoring, you should understand how it works. This means that you’ll have sufficient knowledge to better choose the right Export Factoring solution for your business.
So, how exactly does Export Factoring work?
Essentially, Export Factoring is Invoice Factoring for international invoices. If your business trades overseas, then you are bound to have invoices to foreign buyers, which can slow down your cash flow and cause problems with your working capital needs.
Exactly like domestic Invoice Factoring, you sell your international invoices at a discount to a provider who credit checks your customers and decides if they are able to provide you an Export Factoring solution.
Once you’ve set up a working relationship with a provider, they become your Export Factor and assigns your invoice to another Import Factor in your buyer’s country. You then receive between 70% and 90% of your total invoice value, while the Import Factor collects your customer payments and sends it to your provider. Once your provider receives the amount, they will give you the remaining balance, minus fees.
Here’s an example:
- You invoice a client located in France and decide to work with Export Factor A, who is your primary Invoice Factoring provider in the UK.
- You receive a predetermined percentage of your invoice value, while Export Factor A assigns your invoice to Import Factor B in France.
- Import Factor B proceeds to handle collections from your client.
- Once your client pays the invoice, Import Factor B remits the payment to Export Factor A.
- You receive the remaining balance, minus fees.
What’s more, you get to choose whether to be paid in your client’s foreign currency, or your domestic currency. And get this: no matter your choice, the payments are protected against currency fluctuations.
The costs and contracts involved with Export Factoring vary based on factors such as invoice value, invoice volume, annual turnover, business size, and length of factoring period.
Now I know what you’re thinking, “this sounds a lot like the costs and contracts for regular Invoice Factoring”.
And you’re not wrong!
Since Export Factoring is a branch of Invoice Factoring, the determinants of the costs and contracts involved are similar. If your business is low-risk and has a large invoice volume, then you’ll most likely receive better rates and lower fees.
At the very least, you face a discount charge (interest rate on amount lent) and a service charge (cost of running your Export Factoring facility), along with other contractual charges such as annual fee, minimum usage fee, and other administrative costs.
You should also expect Export Factoring to cost more than Domestic Factoring due to the international scope of operations. The overseas transaction costs plus the involvement of a foreign Import Factor both translate into additional costs for your business and your provider.
Now that you understand how Export Factoring works, let’s move to the best part of this article: The benefits of Export Factoring.
Export Factoring offers multiple benefits such as providing an immediate cash injection for you to make necessary investments. You have the liberty to use this cash advance as you wish! You may choose to cover daily expenses, fulfill customer orders, or even expand into foreign markets.
Besides the clear monetary benefits, your business benefits from Export Factoring through working with experienced providers. They have specialists with the necessary skills and knowledge to help you overcome barriers involved with international trade.
So, if you’re ready then let’s explore the benefits of Export Factoring.
Immediate Cash Injection
Export Factoring releases your cash advance within 24 hours of raising an invoice. Therefore, as opposed to waiting up to 90 days for your foreign invoices to be paid and transferred, you have immediate access to the funds.
You have the option to do whatever you want with these funds. They may be used to cover urgent expenses, purchase new equipment, or fund business development into other foreign markets!
At the very least, you will rest assured knowing that you have the funds to pay suppliers and cover any other costs.
Improved Cash Flow
The available funds also means that you won’t have to face inconsistent gaps in your cash flow. Your business is able to run smoothly, and can get to work on new orders without any setbacks. Relationships with suppliers will also improve as you are able to pay them on time, which may pave the way for supplier discounts!
And get this, even as your business expands and cash flow needs increases, your Export Factoring facility grows too. What this means is you don’t have to worry about funding limits or not having access to enough working capital. Export Factoring providers are more flexible than traditional bank loans and overdraft, which means that you won’t need to re-negotiate your funding terms.
Expertise of Provider
When you work with an Export Factoring provider, you also gain their experience and expertise in the industry. They are connected to foreign Import Factors who are able to help manage your overseas debtor ledger and payment collections. This reduces your risk of international transactions, and overcomes the obstacles you face such as language, law, culture, and currency.
Export Factoring is both time and cost effective. By outsourcing overseas sales ledger management, you free up time and resources to focus on running and expanding your business. Your provider will take care of payment collections, credit checks, and cross-border money transfers. All you have to do is raise your invoices and get paid!
Contrary to popular belief, Export Factoring isn’t meant for every single business that exports a good or service. There are quite a few requirements associated with Export Factoring, as well as extra costs, that result in some businesses being less suitable.
For example, there aren’t many providers who offer Single Invoice Factoring for exporters, because the process becomes much more expensive when only an individual (or selective) invoices are factored on an international scale. Therefore, Export Factoring is suitable if your business has a high volume and/or large invoices to factor.
There are also limits to what countries your invoices are sent, as Export Factoring providers won’t be obliged to cover exports to undeveloped or developing countries due to poor legal and regulatory framework. These countries present a higher level of risk that most providers aren’t prepared to take on.
But onto better news!
You’ll be glad to hear that Export Factoring generally has lower requirements compared to domestic Invoice Factoring. For instance, the minimum annual turnover tends to be £100,000 for exports to EU countries, and £500,000 for exports to non-EU countries. The average minimum turnover for domestic Invoice Factoring is £250,000.
So, if you meet the requirements and have enough low-risk international invoices to factor, consider Export Factoring as an Invoice Finance solution to provide additional working capital and facilitate your business’ growth.
So let’s recap everything you’ve just gone through. Export Factoring is a great, flexible funding solution for businesses with international invoices from foreign buyers. It provides another source of funds that allow you to cover daily expenses, improve cash flow, and expand your business into new markets.
Your relationship with your Export Factoring provider also gives you much more beyond immediate access to funds. You benefit from their experience and expertise in managing overseas sales ledgers, credit control, and collections, which also enables you to have more time to focus on running your business.
Congratulations, you’ve made it to the end of this article and now know all the important bits about Export Factoring! Now it’s your turn to use this information and decide the next steps for your business.