Finance for Exports: Factoring
Many major banks have factoring houses associated with them, and there are now over forty institutions offering factoring or similar services in the UK. A factor buys unpaid export (or domestic) invoices and may assume responsibility for getting the seller’s customer to pay them. If the arrangement is without recourse to the exporter, the factor absorbs any losses resulting from the customer’s default. If it is disclosed the customer knows that he is paying the factor and not the exporter, but factoring is increasingly seen as an efficient way to manage payments. Factors have correspondents overseas who enable them to achieve a high standard of customer compliance at low cost, and companies which use factoring usually find it much cheaper than pursuing overdue payments for themselves.
Larger factors offer the full service; smaller ones do not all offer non-recourse arrangements but will usually arrange credit insurance. Invoice discounting (buying invoices at discounts related to the perceived risks) provides finance for companies, usually larger ones, not requiring credit protection or administration of the sales ledger. The service is not disclosed to the customer overseas and there is full recourse to the exporter if the customer does not pay. Between the full service and invoice discounting there is agency factoring (bulk factoring).
This is disclosed to the customer but the exporter is responsible for obtaining payment and the factor has recourse to him for bad debts. It is suitable for a client who is not well established, too small for invoice discounting, or who has a well-managed sales ledger with a large number of low-value debts. In effect it finances the need of the client’s customer for credit. An enquirer may find that a particular factor will not offer a particular service, such as invoice discounting for export payments, but the answer may depend on who enquires.
The key advantage of factoring is that it turns sales into immediate cash and avoids the danger of overselling – spending money faster on production, distribution etc. to support sales than it is coming in from payments, so that a company can run out of money unless the situation is brought under control – but it can be a useful and cost-effective adjunct to sales departments generally, allowing management to concentrate more on developing the business.
This is an extract from Tate’s Export Guide, for more information in regards to exports, imports or anything else involving international trade please visit our website (www.tatefreightforms.co.uk) or call us on 01908 221162.
Topics: Distribution, Finance, Freight Forwarding, Payments, and Transport & Logistics