Both exporters and their buyers rely on positive cash flow to fuel growth. If you’re not in a position where more money comes into your business than goes out, it’s difficult for any company—be it seller or retailer—to achieve their expansion goals. For exporters, who look to attain growth by partnering with large international buyers, the ability to offer open account terms to their customers is crucial to the success of the relationship, even though this arrangement temporarily impedes the inflow of cash to their business. On the other hand, although exporters would like to meet the requests of their buyers , they also need to protect themselves from payment default.
To ensure exporters have sufficient liquidity at hand until they receive payment and to absorb the risk of buyer insolvency, international factoring companies can come into play as the missing cog to facilitate a seller/buyer partnership where both parties are accommodated. Factoring companies provide the oil necessary to keep today’s global trading economy in motion by offering the financial instruments needed to help small and mid-sized exporters compete in today’s fierce trading environment.
Open Account Transactions Explained
Buyers benefit greatly by purchasing goods on open account terms. In general, an open account transaction is an agreement whereby the exporter ships goods before any payment is due by the buyer. Payment terms offered by the exporter usually entail invoices due 30, 60, 90 days or longer after shipment.
As an exporter, offering such a generous extension of credit under an open account arrangement is inherently risky and exposes them to payment default. Determining whether such an arrangement is viable usually requires an examination of the following factors relating to the buyer:
- Exposure to commercial risk including creditworthiness of the buyer
- The political climate and economic conditions of the region
- Potential cultural influences
Furthermore, when transacting under open account terms, available capital becomes tied up for months at a time until the buyer pays their invoices.
Nevertheless, exporters need the ability to offer open account terms to compete in the global market. One effective solution to do so and safeguard against shortfall in payment is export factoring.
The Role of Export Factoring
Export factoring is a bundle of financial products, including sought-after liquidity and security, to assist small and mid-sized companies with their business pursuits and operational health. At its core, export factoring involves the factor purchasing the exporter’s short-term accounts receivables at a discount.
Unlike a loan or a pure financing agreement, the financing of an exporter’s receivable provides a number of desired benefits apart from just funding:
Accounts receivable management & credit reporting: The factor handles all aspects of collecting payment on your accounts receivable and acts as your credit department by monitoring the creditworthiness of your customers. This reduces the exporter’s overhead costs normally required to staff or outsource account receivable and credit reporting duties.
Credit protection: The factor assumes all the risk if a buyer fails to pay their invoices. Known as non-recourse factoring, this means once the export factoring agreement has been executed, the risk of non-payment is transferred to the factor.
Fast access to capital: After inspection of the creditworthiness of the buyer, the factor can advance payment on your receivable within 24-48 hours of invoice submission.
Balance sheet protection: Unlike other alternatives such as long-term bank financing, expensive bridge loans, or unsecured debt arrangements, export factoring does not add debt to the balance sheet.
The cost attributed to export financing is reflected in the discount the factor receives when purchasing a company’s accounts receivable Depending on the creditworthiness of the buyer, the goods exported, and payment terms, factoring companies can offer up to 95% of the total invoice value.
Nearly 80 percent of all worldwide trade is conducted on open account terms. Working with international factoring companies such as Tradewind Finance will provide your business with the tailored cash flow solutions it needs to grow and win buyers in today’s global trade economy.