Export factoring is a complete financial package that may include and combine export working capital financing, credit protection, foreign accounts receivable bookkeeping, and collection services. A factoring house, or factor, is a bank or a specialized financial firm that performs financing through the purchase of invoices or accounts receivable.
Export factoring is offered under an agreement between the factor and exporter, in which the factor purchases the exporter’s short-term foreign accounts receivable for cash at a discount from the face value, normally without recourse. Export factoring is regularly done without recourse so that the factor assumes the credit risk of the foreign buyer to pay and handles collections on the receivables.
Thus, by virtually eliminating the risk of non-payment by foreign buyers, export factoring allows the exporter to offer open account terms, improves liquidity position, and boosts competitiveness in the global marketplace. Factoring foreign accounts receivables can be a viable alternative to export credit insurance, long-term bank financing, expensive short-term bridge loans or other types of borrowing that create debt on the balance sheet.
Export factoring is most suited for continuous short-term export sales of consumer goods on open account terms; however, it can be used by almost any exporting company that sells a product or service on payment terms in a variety of industries.
Characteristics of Export Factoring
Applicability: Best suited for an established exporter who wants (a) to have the flexibility to sell on open account terms, (b) to avoid incurring any credit losses, or (c) to outsource credit and collection functions.
Risk: Credit risk inherent in an export sale is virtually eliminated.
Pros: Eliminates the risk of non-payment by foreign buyers. Faster payments and improved cash flows.
Cons: Generally more costly than export credit insurance. Generally only available in developed countries.
Key Points
• Export factoring offers 100 percent credit risk protection against the foreign buyer’s inability to pay – no deductible or risk sharing.
• Export factoring promotes faster payments and improves cash flows.
Export factoring is most suited for continuous short-term export sales of consumer goods on open account terms; however, it can be used by any exporting company that sells a product or service on payment terms.
• Export factoring is an option for small and medium-sized exporters, particularly during periods of rapid growth, because cash flow is preserved, and the risk of non-payment is virtually eliminated.
• Export factoring is less suitable for the new-to-export company as factors generally (a) do not take on a client for a one-time deal and (b) require access to a certain volume of the exporter’s yearly sales.
• Export factoring is generally a more expensive option that may impact a significant amount of an exporter’s margin than other less expensive financing options.
• Export factoring is generally not available in developing and emerging countries.
• The advance rate is generally limited to 80 percent of invoices that are factored.
How Does Export Factoring Work?
The exporter signs an agreement with the export factor who selects an import factor through an international correspondent factor network, who then investigates the foreign buyer’s credit standing. Once credit is approved locally, the foreign buyer places orders for goods on open account. The exporter then ships the goods and submits the invoice to the export factor, who then passes it to the import factor. The import factor then handles the local collection and payment of the accounts receivable. During all stages of the transaction, records are kept for the exporter’s bookkeeping.
Two Common Export Factoring Financing Arrangements and Their Costs
In (1) discount factoring, the factor issues an advance of funds against the exporter’s receivables and awaits payment and collection from the importer. The cost is variable, depending on the time frame and the dollar amount advanced. In (2) collection factoring, the factor pays the exporter (less a commission charge) when receivables are at maturity, regardless of the importer’s financial ability to pay. The cost is fixed, and usually ranging between 1 and 4 percent, depending on the country, sales volume, and amount of paperwork.
Limitations of Export Factoring
• Factoring is limited to countries with laws that support the buying and selling of receivables.
• Factoring generally does not work with foreign account receivables that have more than 180-day terms.
• Factoring may be cost-prohibitive for exporters with tight profit margins.
What Types of Industries Use Export Factoring?
Companies turn to export factoring for a variety of reasons, including but not limited to: eliminating the risk of non-payment by foreign buyers, speeding up invoicing for faster payments, improving cash flows, expanding operations, or simply reducing the administrative burden in the short or long term. Companies that get the most out of export factoring are those that sell consumer goods on a continuous basis. However, almost any company that exports a product or service on payment terms can benefit from utilizing export factoring. Below is a short list of industries that use export factoring.
• Consumer Goods
• Agricultural Products
• Textiles, Apparel, and Footwear
• Light Manufacturing Products
• Raw Materials and Chemicals
• Services, Logistics, Business Process Outsourcing
Where to Find a Factor?
The international factoring business involves networks, which are similar to correspondents in the banking industry. There are two sources for global networks: FCI (formerly known as Factors Chain International) and the International Factoring Association (IFA). Headquartered in the Netherlands, FCI is the global representative body for factoring and financing of open account domestic and international trade receivables.
Headquartered in Avila Beach, California, the IFA, the largest association of commercial finance companies in the world, provides a way for commercial factors to get together and discuss a variety of issues and concerns in the industry.
For more information about FCI, go to: https://fci.nl/en.
For more information about the IFA, go to: https://www.factoring.org/.
Export Factoring Industry Profile
According to FCI, the total worldwide volume for factoring in 2020 was $3.35 trillion, up more 2.7 percent from 2019. The 2020 data indicates that exporters and importers around the world are becoming more and more familiar with the advantages to be derived from a factoring arrangement. Although U.S. export factors have traditionally focused on specific market sectors such as textiles and apparel, footwear, and carpeting, they are now working with more diversified products.
Today, U.S. exporters who use export factoring are manufacturers, distributors, wholesalers, or service firms with sales ranging from several million dollars to several hundred million dollars. Factoring is also a valuable financial tool for larger U.S. corporations to manage their balance sheets. Total international factoring volume in the United States is now worth around $79 billion annually, greatly contributing to the growth in U.S. exports.
These links updated: 4/23/18. This website has been funded in part by the U.S. Commercial Service. Copyright (c) All Rights Reserved by the District Export Council of Georgia. Image:: Fotolia_47136361_Subscription_XL .