Export Factoring is an account receivable financing technique essential to ensure a steady cash flow for business owners conducting overseas transactions. Unlike traditional institutional lenders, export factoring offers a comparatively flexible eligibility criterion. As a result, micro, small & medium enterprises [MSMEs] can opt for this service comparatively easily.
This lending protocol can further benefit MSMEs as it does not function like export credit insurance, bank financing, or short-term bridge loans. So, the funding will not be presented as a debt on the balance sheet of the businesses. Moreover, as there is no need for collateral in this transaction model, small businesses lacking assets and capital can also obtain export factoring facilities.
Export factoring, consequently, has emerged as a user-friendly means of invoice financing. Leading Fintech service providers like KredX, India's largest supply chain platform, function as a financial intermediary in offering businesses invoice financing and other facilities.
What Is Export Factoring?
This business model combines the notions of credit protection, export working capital financing, foreign accounts receivables, bookkeeping and collection services. During a sale, an exporter usually raises an invoice on the importer against the goods sold. Both parties agree that the importer will repay the exporter at the end of the decided credit period.
This retailer or exporter can sell his/her accounts receivable due from an importer to a third-party financing firm referred to as the Export Factor. These factors, in turn, pay off a significant percentage of the invoice upfront, ensuring an unrestrained cash flow needed for the proper functioning of a business. At the end of the maturity period, a Factor collects the complete repayment from the importer and pays off the rest of the invoice to the exporter minus a fee.
Notably, these foreign accounts receivable-based funding is usually provided with non-recourse. So, a Factor essentially takes on the risk proposition of non-payment from the importer's end, which is inherent in a foreign sale. Consequently, export financing ensures that an exporter is not adversely affected by a debtor's payment failure. This, in turn, enables the exporters to opt for more open account transactions, leading to a competitive global marketplace.
What Are The Benefits Of Export Factoring?
There are numerous positive impacts of export factoring for businesses, such as-
- It may take a few months for the exporters to receive the repayments from the foreign importers. A Factor, on the other hand, ensures that the economic acceleration is generated within a few days.
- Factors sanction the funds based on the creditworthiness of customers or importers, not according to the financial status of exporting businesses. So, the product market's uncategorised MSMEs can benefit equally from this service as the traditional Blue-Chip companies.
- By transferring the invoices to an intermediary financing firm, businesses can achieve a streamlined workflow without worrying about dunning and collections.
- A flexible regulatory framework allows the scope of a simpler documentation procedure for export factoring. As a result, this scheme offers a time-efficient alternative to the exporters by reducing the usually prolonged span of credit administration.
- With this business scheme swiftly becoming a successful economic trend, funding entities are now competitive to purchase lucrative accounts receivables. So, the businesses can offer extended payment terms, attract larger buyers, and generate expanded turnovers.
- While dealing with overseas importers, export factoring saves businesses the costs associated with Letters of Credit, Documents against Acceptance and Documents against Payment.
- As factoring is technically an advance, not a loan, it does not increase a company's external sources.
- Regional experts of the Factors ensure that the undertaking is conducted in compliance with the regulations of the countries they operate in. Trusted FinTech services lay a great emphasis on notions, such as currency regulation control.
- Export factoring can also strengthen a company's revenues as it improves Days Sales Outstanding [DSO] measures.
- This facility offers 100% credit protection when it comes to customer insolvency.
- Foreign accounts receivable factoring allows a business to have a hefty net income over its expenses. Consequently, this business would enjoy an improved borrowing potential.
- Moreover, fintech service providers ensure that domestic business entities do not face any obstacles while dealing with an international trade circuit. Consequently, export factoring is also a crucial element in business expansion purposes. A company, for example, will have a stable and straightforward operating regime in the global market to ensure sustainable growth.
- Stringent policies of institutional lenders or their interest in revenue streams and cross-sell opportunities often make them nonchalant about customer attrition rates. Alternatively, a business enjoys personalised and customised transaction procedures with financing Factors. So, when it comes to SMEs, export factoring is able to offer trade benefits such as reconciliation services other than the initial liquidity boost.
- As opposed to these aforementioned traditional lenders, export factoring offers scalable financing to the MSMEs. As in, the fund it sanctions is not essentially limited or exhaustible. This funding can exponentially grow according to a company's orders and invoice increase.