Export finance: Factoring in getting paid early by export customers
What to look out for
- Red Helps you access export revenues quickly. Fees reduce your overall profits but your risk is mitigated
- Amber Letters of credit help protect both exporters and importers by ensuring both sides meet their obligations
- Green Factoring helps you access funds quickly without having to wait months for overseas customers to pay
Your guide to export finance and how factoring can help you get some of the value of your export sales before your customers have even paid.
Where do I find export finance?
Many banks that once helped local businesses get funding for exports no longer do so and the ones that still work with would-be small exporters can tend to be picky about businesses with no exporting history. But don’t write off anything, it is worth picking up with banks to see if any of them can support with letters of credit or other financing options.
Subsidiaries of foreign banks from the market that you’re targeting may be eager to promote more trade with their country, as well as offering business insights and tips for dealing with regulations that only a local would know.
Local Chambers of Commerce and government organisations, such as UK Trade & Industry and UK Export Finance can help with practical advice and support.
There are also some non-bank lenders happy to get involved, so have a look at our platform.
Where do I find ‘practical advice and support’ for export finance?
Happily. Some government agencies or organisations, such as UKEF who I mentioned above, work with small businesses by acting as a sort-of middleman between you and the bank. For example, after reviewing your situation, they may provide a partial guarantee for working capital. By doing this, they’re essentially sharing lender risk, which makes banks more comfortable about offering you financing. A partial guarantee might also make them willing to loan you more cash than they would have before, or to open up a larger line of credit.
These organisations can also help you obtain any necessary letters of credit from the bank. By issuing a letter of credit, the bank provides greater security for exporter-to-customer transactions. The letter ensures that the customer will pay the specified amount within a specified timeframe once the exporter has fulfilled the shipment and delivery terms.
Again, our platform can help you access lenders who might be willing to assist with these options, as well as with another possibility which is factoring.
What is factoring?
Factoring lets you get some of the value of your export sales before your customers have even paid their invoices.
It works like this: say you’ve shipped an order to a customer overseas, and that customer has now taken delivery of those products. You’re ready to send an invoice, but that doesn’t mean you can expect payment right away, you might have to wait 90 days or more for the cash to arrive.
With factoring, when you invoice your customer, you also send a copy to an invoice finance lender. That organisation then advances you a portion of your total invoice – maybe as much as 90 per cent – within a day or so. You get money much earlier than three months from now, and the invoice finance company chases your customer for payment in full. Once that payment comes through, you get the remaining balance of your invoice.
Where does the factoring provider make its money?
The invoice finance lender will charge a fee for its services and usually takes that amount out of the advance it pays you. So, yes, the service will cost you but you’ll be able to access other services for that fee as well. Organisations that offer factoring can also take care of your collections and sales ledger management and usually provide a way for you to keep track of everything online.
Why you might negotiate a lower price for quick payment
Not necessarily the most attractive, neither is it a ‘funding type’, but if you have already exported the goods and your customer has received them, but payment is not yet due, it may be worth negotiating a lower price in return for quick payment. Work out the benefits and implications though, before you start such negotiations!