Export Factors: Making Exporting Safe, Simple, and Profitable
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.
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.
Conditions usually include a dollar-denominated line of credit per buyer and set payment terms. Generally, the only documentation is the shipper's accounts receivable. Factoring can be done with or without the knowledge of the buyer. Therefore, open-account terms are feasible, and factoring need not upset any existing business arrangement.
International Credit Today
For more information on international credit issues, check out Credit Today's
International Credit Today
... If you are not extending international credit now, you may be in the next year or two. Learn the ins and outs of doing business in Mexico and South America and the future of business in Asia. We tell you how to collect foreign debts, how to use international credit reports, how to do international collections by telephone, the meaning of the key Incoterms, and the uses of forfaiting and letters of credit.
International Credit Today
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Participants sell their overseas receivable for a fee generally ranging from 2.5% to 5% of the invoice amount. In return, they get guaranteed payment, reduced administrative costs, and certain credit enhancements. By comparison, the total cost of a single letter of credit to both the buyer and seller can be slightly less than a factor. However, a line of credit will be required for the buyer, and unused L/Cs have associated costs. In addition to the premium for export credit insurance, you must add credit investigation costs, deductibles, and collection charges.
Factoring offers some distinct advantages to exporters, particularly where open-account terms are required for competitive reasons. Factoring may be the solution to developing or expanding your overseas marketing opportunities for the following reasons:
- 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.
Editor's Note: Frank E. DuBrava, a leader in the field and well-respected credit exec and commercial credit consultant on both domestic and international issues was based out of Connecticut and passed away in recent years. We include this vital material in his memory.
Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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