3 Situations in Which You Should Use International Invoice Finance

In a 2019 report, the World Trade Organisation estimated that the vast majority of the $23 trillion (USD) spent in annual global trade relies on some type of trade finance.

The Covid-19 pandemic has disrupted the global economy and its supply chains. India and China saw growth in exports weaken throughout 2019 and 2020. Similarly, services exporters in Brazil recorded negative year-on-year growth in three out of four quarters.

The pandemic has highlighted how important digital operations are to keeping international trade flowing. Technological innovation continues to drive successful global business and help companies to bounce back.

For international Exporters, digital trade financing encompasses a range of services, including:

Bank loans
Letters of credit
Invoice financing
Credit insurance

Trade Finance Demand

Although there is a high demand for trade financing, the option isn't always available to small- or medium-sized enterprises (SMEs) engaged in international trade.

The Asian Development Bank calculates the unmet demand for trade financing to be $1.5 trillion (USD) globally, with exporters in Asia finding working capital especially difficult to access.

International invoice financing services can be the solution Exporters need to solve their cash flow problems. So how can invoice financing help and when should you consider using it?

What is International Invoice Finance?

Invoice financing (also known as invoice factoring) is a term for financing based on using unpaid invoices as collateral for loans. Invoice financing allows Exporters to improve cash flow by receiving advances from an invoice finance company.

The invoice factoring company pays the Exporter an initial amount of the unpaid invoice and may also (depending on the type of factoring used) chase the Importer for payment when the invoice falls due. Once the invoice is settled in full, the factor pays the balance of the invoice to the Supplier, minus a small fee.

Why is International Invoice Finance Used?

Invoice financing solves several problems common to international trade.

Suppliers (Exporters) receive an upfront payment when goods are shipped.
But Buyers (Importers) can still benefit from generous deferred payment terms from those same Suppliers, allowing them time to receive, distribute and sell those goods before paying the invoice.
In the case of non-recourse factoring, the risk of Buyers not paying is taken on by the invoice factoring company.

Invoice financing is widely used in domestic trade deals and is becoming increasingly popular in cross-border trade.

Figures from FCI (the global representative body for cross-border factoring) show that:

International factoring volumes grew 5.4% from 2018 to 2019.
Although global factoring volumes dropped in 2020 due to Covid-19, these have now increased.
North-East Asia has become a particularly active trade finance centre.

Invoice financing is becoming more common in cross-border trade because it works conveniently alongside bank loans. It's a highly flexible option for Exporters and allows them to choose which invoices to finance and when.

3 Ideal Scenarios for International Invoice Finance

While many companies rely on invoice financing (also called account receivables financing) for everyday cash flow needs, three examples stand out in which international invoice factoring can be especially beneficial.

1. Rapid growth

Fast-growing companies often have capital needs that exceed their bank lines of credit or loans.

For these firms, invoices are assets that can be quickly converted into cash without affecting banking arrangements. Invoice financing is a straightforward way for Exporters to get instant working capital for their business needs.

This is especially beneficial for companies operating in sectors with high seasonal demand, like apparel and holiday products. Seasonality can cause significant fluctuations in a company's cash flow, inventory and profitability, all of which can make a bank decide against lending money. Invoice financing solves this problem by providing instant cash during peak times.

2. Turnaround situations

The aftereffects of Covid-19 are still being felt, with many companies in a 'turnaround' phase, in other words, companies that are slowly returning to growth after a period of disruption.

Even though some firms in turnaround phases might have ambitious growth plans they may not always have the means to secure a bank loan to finance them.

Invoice financing can be a lifeline in such situations, providing a vital cash supply during recovery periods when other financing options may not be available. With invoice financing, approvals are based on the Importer's credit rating, not the Exporter's.

3. Trading with countries outside of bank jurisdiction

Since the 2008 financial crisis, banks have been stepping back from international trade activities. The pandemic has also increased the strain on cross-border trade measures.

Lending regulations have become more restrictive, there is costly and time-intensive paperwork to complete, and geopolitical risks have become more volatile.

These issues have contributed to the $1.5 trillion (USD) trade finance gap which has indirectly affected firms in the middle market. These companies turn to invoice financing when their bank will not support sales to a country it lists as 'ineligible'.

Therefore, invoice financing has become a suitable option for Exporters trading globally, especially those located in emerging markets with poor banking facilities.

If you are interested in learning more about invoice factoring, Stenn has a dedicated FAQ section where you can find more information about our invoice financing services. We also provide videos which explain the company and the financing process in detail.

About the Authors

This article is authored by the Stenn research team and is part of our educational series.

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.

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Disclaimer: The above article has been prepared on the basis of Stenn's understanding of the subject. It is for information only and doesn't constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.