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.
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.
There are numerous positive impacts of export factoring for businesses, such as-
Factoring is an affordable, easy-to-access solution regarding the need for immediate wherewithal for a company's day-to-day expenses. Advantageous extended payment terms also give them an edge over the competitive market sector.
As this business scheme is effective for the business-to-business [B2B] transaction model, MSMEs, manufacturing companies and corporates, etc., are eligible to opt for this service.
A business owner may opt for this facility when exporting products and services to an open account overseas.
In export factoring, the importers or customers repay directly to the factoring company. So, they also report to this company if there are any issues with claims and credit notes received.