If you are an exporter of goods to other countries, then at some time or the other, you must have faced a cash crunch and wished that you had ready cash in hand, instead of having to wait for your customer’s payments to arrive. Well, you now have a way of getting ready cash against your international invoices. Here’s how.

Due to heavy competition, you could have been forced to offer credit to your customers. If you have exported your goods on credit, then your local export factoring company will “buy” your receivables off you after you have dispatched the goods to your customer. They will send these receivables to an import factoring company situated in the same country as your customer, who will then do the follow up in getting your payment released on the due date. So, in international factoring, two factoring companies are normally involved.

You will get around 90% of your invoice amount immediately within a few days, which will be wired to your account by your factoring company. The balance will be transferred to your account, once your customer has released the payment on the due date. This last payment will be minus the factoring company’s charges for providing you this service, which is normally 2.5% to 4% of the total invoice value. This percentage of charges will depend on the credit period you have given to your customer, the credit rating of your customer as decided by your factoring company, and the total amount of business, value wise, which you provide to your factoring company.

These factoring companies can also take care of your collection of payments from your customers. This can be a boon for you, since you can now concentrate more on sales rather than worry about collections. The factoring company will send you regular updates of the receivable reports of your customers, enabling you to have an accurate status of your financial side of your business.

The advantages of international factoring are that your cash flow improves immediately, enabling you to pay off immediate expenses like staff salaries, bulk purchases, etc and also eliminates the need to maintain an international collection department. This facility also gives you a chance to expand your business by taking on more exports to different countries, where your factoring company has tie-ups. This facility is also convenient rather than taking a bank loan, which would normally require guarantors, collateral and intensive documentation. You would have to pay interest on that loan in any case. International factoring is more like an extension of your current business, as it takes care of your payment collection as well as provides you with ready cash.

You should note that these services of an international factoring company are slightly expensive, since two factoring companies are involved. There should also, not be any quality problems with regards the goods, which you have exported. You will also have to commit a minimum amount of business to your factoring company. Since your factoring company might take over your collections side and even take care of your bad debts, there could be some friction between you and your customers. Your factoring company might also ask for collateral from your customers as a guarantee against bad debt, which your customers might be averse to giving.

So, after studying the above points, you too can go in for international factoring of your invoices, to put your business on the fast track.



Thanks to Kris Koonar for contributing this article to our Factoring blog:

Factoring Tips

Can you answer Alex A’s question about Factoring?:

If land or houses built and in inventory are impaired and “written down” to mkt value which reduces profit on the P&L as an expense or charge, why does this figure end up as an increase on the cash flow statement?

Its a non-cash event is it not? Example: if you write down the value of land and a house (you’re a builder) for $50,000 due to fallen prices, why does this $50,000 charge end up as an increase to the cash account and improve the cash flow statement?

Obviously, I’m not an accountant and this seems very counter intuitive. If what I described is correct, you do not have an additional $50,000 in your bank account to spend.

What am I missing?

Structured Settlement Funding