Export factoring is a financial process where import and export companies sell goods and services to clients and then sell the open 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 a stabilized local bank or company, mitigate risk through selling qualified receivables, and only use factoring for short-term financing.
When working in foreign countries, companies are required to follow all applicable laws regarding business transactions. Some countries may not recognize accounts receivable as a form of ownership for a client’s or customer’s capital. This can make it difficult to factor receivables because the company or bank purchasing the accounts will be unable to collect the money through the foreign country’s legal system. Factoring banks will therefore face a losing proposition if they purchase receivables with only the hope to collect the money based on the goodwill of the client or customer owing the balance.
Companies factoring receivables internationally will need to select a stabilized bank or other partner for this process. These institutions need to have capital to pay upfront for the receivable based upon previously set percentages. Failure to select the right partner for export factoring can result in companies having to buy back sold receivables or losing money if they agreed to a pro-rated pay schedule for receiving their money. A stable factoring partner will also ensure the bank or company is available for future transactions, creating a strong business relationship for factoring receivables.
Export factoring — similar to domestic factoring — will typically work best when selling receivables owed by creditworthy customers under 180 days or less. This ensures the domestic company will receive the most money when factoring receivables. It also helps the company to avoid entering recourse factoring agreements. Factoring banks and companies will require the seller to repurchase any receivables the company cannot collect. This is especially difficult if a domestic company has little knowledge or expertise in working in a foreign country.
Factoring is best as a short-term solution for cash financing. Continually selling receivables will result in companies losing money in the long run. For example, most export factoring results in companies only receiving about 80 to 90 percent of the total balance on their open accounts receivables. This results in a loss on these sales, which may be worse if the foreign country has an unfavorable exchange rate. Companies will then lose additional dollar value from transferring this money to their domestic operations.
