Although many export transactions are usually paid through letters of credit, many large foreign customers that are buying goods or services from US companies are demanding conventional payment terms and paying using wire transfers. This can put companies in a serious bind for a couple of reasons. First, they may not be able to wait the usual 30 to 60 days to get paid. And second, determining whether a foreign company is credit worthy can be complicated and risky. This latter point is compounded if you sell in multiple countries with different levels of reporting and financial transparency.

One solution that can be used in these circumstances is called export factoring. This is a type of factoring that is offered to companies that export goods and services. Export factoring works in the same way that factoring does, where the factoring company advances your business funds against your foreign receivables. However, since the risk is higher than in conventional factoring, rates tend to be higher and advance rates tend to be lower.

This brings us to the next question – why is the risk in export factoring transactions higher? Basically, this is for two reasons why the risk is higher. First, researching credit for foreign companies is difficult and is also less reliable than credit scores in the US. Second, many of the payments fall outside of US law, which means that disputes need to be resolved in a foreign country at great expense.

One of the advantages of working with a company that offers invoice factoring to exporters is that you get to leverage their credit expertise. They have access to a variety of sources that can be used to determine the credit worthiness of a foreign company (i.e. credit reports, credit insurance opinions, etc). You can use their resources to your advantage, ensuring you make better credit decisions.