A major barrier facing companies trying to break into the international market is the assumption of credit risk, particularly for a company that is not familiar with the nuances of international finance. This often leads to an all-or-nothing approach: Assume no risk by declining all overseas orders, or assume all risks by using open-account terms. Then there's the middle ground, where some exporters require confirmed letters of credit or payments in advance, while others purchase credit insurance to protect themselves. These conventional processes can be complicated and expensive, and often result in delays.

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

A better approach to the problem of accepting foreign sales may be the use of an export factor. In its basic form, a factor preapproves the creditworthiness of a buyer prior to shipment and, within agreed terms, guarantees payment by the buyer to the shipper. In the event of late payment, the factor has the responsibility to pursue the payment or make payment itself in full. On the other hand, with export insurance, collection is the responsibility of the exporter, who must satisfy the insurer of appropriate efforts to collect.

• Transactions are 100% protected against credit losses, and no claim forms need to be prepared or filed.

• Overseas sales are expanded by offering open terms and conditions that are truly competitive with suppliers in each local market.

• Added expenses and delays, so often encountered in negotiating letters of credit, are avoided.

• Cash flow is improved through expedited collections and remittances.

• Administrative, credit, and collection costs are reduced.