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Export factoring involves selling receivable balances to a bank, but it’s important to operate in a country with property rights laws, choose an established local partner, sell qualified receivables, and use factoring for short-term financing. Selecting the wrong partner or selling receivables for too long can result in losses.
Export factoring is a financial process in which import and export companies sell goods and services to customers and then sell the receivable balances to a bank. The bank is then responsible for collecting these balances. The best tips for setting up the export factoring process are to operate in a foreign country with laws protecting property rights, select an established local bank or company, mitigate risk through the sale of qualified receivables, and use factoring for short-term financing only.
When working in foreign countries, companies are required to follow all applicable laws regarding business transactions. Some countries may not recognize receivables as a form of ownership for a client’s or client’s capital. This can make factoring receivables difficult because the company or bank purchasing the accounts will not be able to collect the money through the foreign country’s legal system. Factoring banks will therefore face a losing proposition if they buy receivables with the sole hope of collecting the money based on customer or customer goodwill due to the balance.
Companies factoring receivables internationally will need to select an established bank or other partner for this process. These institutions must have the capital to prepay the credit based on pre-established percentages. Failure to select the right export factoring partner can result in companies needing to buy back sold receivables or losing money if they have agreed to a prorated compensation plan to receive their money. A stable factoring partner will also ensure that the bank or company is available for future transactions, creating a strong business relationship for factoring receivables.
Export factoring, similar to domestic factoring, typically works best when selling credit accounts receivable that are less than 180 days in duration. This ensures that the domestic company receives the largest amount of money for receivables factoring. It also helps the company avoid entering into non-recourse factoring agreements. Banks and factoring companies will require the seller to buy back any receivables that the company cannot collect. This is especially difficult if a domestic business has little knowledge or skills in working in a foreign country.
Factoring is the best short-term solution for cash financing. Continued selling of receivables will result in long-term loss of money. For example, most export factoring results in companies receiving only about 80 to 90 percent of the total balance on their outstanding receivables. This results in a loss on these sales, which can be worse if the foreign country has an unfavorable exchange rate. Businesses will then lose additional dollar value from moving this money to their domestic operations.
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