Trade Financing for Export Companies
Going beyond the national borders and selling goods and services to companies in other countries can be a platform for growth. Many US and Canadian companies have been able to exceed their growth objectives and diversify their revenues simply by going to the export market. However, selling products and services internationally also has its risks.
One common problem, especially if you sell to large companies, is that foreign clients will often demand trade credit. This enables them to pay your invoices in up to 60 days. While this a common occurrence, it brings two potential problems. First, many small companies cannot afford to wait up to 60 days to get paid. Usually, they don't have financial reserves and need money sooner to pay their operating expenses. Second, offering terms can increase the chances of payment delinquencies. You need to know how to evaluate credit so you can determine which companies deserve it, and which should pay in advance.
One way to solve both problems is to use export factoring, a trade financing solution that has been growing in popularity in recent years. Basically, this solution allows you finance your invoices through a factoring company. You get immediate access to funds, while the finance company waits for payment. Since the invoice is the collateral for the transaction, the finance company will review your client's credit very carefully and only fund those that qualify. As an added service, they can provide credit advice so that you can seek an appropriate and secure alternate payment method.
Most export factoring transactions are relatively simple and are funded in two installments. They integrate well with most companies and can be deployed quickly. The transaction flow as follows:
- You deliver the goods to your client
- You invoice your client and send a copy to the finance company
- The finance company provides the 1st installment - the 80% advance
- Your client pays on their usual terms
- The finance company rebates the remaining 20% (less a fee) as a 2nd installment
The cost of the transaction is based on a number of criteria, including the credit worthiness of your client, the size of your invoices, the risk profile of your invoices and your industry. In general, rates go from 1.5% to 3% for every 30 days, though these vary.
One advantage of this solution over conventional export import financing solutions, is that factoring is easier to qualify for than conventional financing. The most important requirement is to have credit worthy invoices. Additionally, your company should have:
- Invoices that are free of liens
- No serious legal or tax problems
- Owners and managers with industry experience
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