Exporters are facing increasing insistence by importers for trade to be conducted on open account terms.
An open account transaction means that goods are shipped and delivered before payment is due, usually within 30 to 90 days. Although this is a most advantageous option for the importer, both in terms of cash flow and cost terms, it is also the highest risk option for an exporter.
This state of affairs is a direct consequence of the increasingly competitive nature of world trade and often means that the exporter ends up receiving payment many weeks or even months after delivery.
Being able to offer international customers better financing terms is now an important part of any sales package. Many organisations find that giving buyers credit in this way can lead to severe cash flow problems which can complicate the exporter’s life further if the importer delays payment beyond originally agreed terms – or worse still, makes no payment at all because of financial failure.
While this method of payment will enhance export competitiveness, exporters should thoroughly examine the economic, political and commercial risks, as well as relevant cultural influences to ensure that payment will be received in full and on time. One solution to substantially mitigate the inherent risk of non-payment associated with open account export sales is export factoring.
Export factoring is offered under an agreement between the factor and the exporter, in which the factor finances the exporter’s short-term foreign accounts receivable, normally without recourse.
In this case, the factor assumes the risk on the ability of the foreign buyer to pay and handles collections on the receivables, virtually eliminating the risk of non-payment by foreign buyers.
By adopting this trade finance instrument, exporters can cash their invoices for up to 90 per cent of the approved invoice value, with further options for risk protection with 100 per cent coverage and debt collection. Risk protection means that the exporter is secured against bad debts once it has performed under the purchase contract, while debt collection would be performed by professional correspondents in the buyer country and in the buyer language. This would allow the exporter to focus on business development rather than chasing customers to settle invoices.
The benefits of export factoring are clear: it provides the exporter with the capability to offer open accounts, and apart from improving the company’s liquidity position, it also boosts its competitiveness in the global marketplace.
One advantageous element of export factoring is that the exporter’s factoring line is normally dynamically tied to the company’s revenues. This means that unlike other forms of export financing, factoring typically does not have a fixed limit as is the case with a bank loan or overdraft.
As long as the exporter’s sales ledger contains solid customers, it will grow as the business grows.
Additionally, the adoption of this financial tool could be an exceptional way to tap new markets, by getting the preliminary approval of credit limits for potential new customers from expert credit analysts for each country or market.
Fimbank plc is a dynamic trade finance bank committed to providing specialised trade finance services to corporate clients, banks and individuals located worldwide.
The bank offers a comprehensive range of factoring services specifically designed for businesses involved in exporting, seeking to benefit from the advantages of these flexible and secure working capital facilities.
Mr Zammit is head of public and media relations at Fimbank plc.
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