Banks and financial institutions in some regions have become progressively more reluctant to lend money for cross-border trade. Regulations and restrictions have forced banks to reconsider many international activities, with some viewing global trade as too risky.
Therefore, Suppliers engaged in global trade have limited opportunities to access finance. However, one of the more convenient solutions is export receivables financing (also known as accounts receivable (A/R) financing).
Accounts receivable financing is also known as invoice financing or invoice factoring and is an increasingly popular type of trade financing. Rather than wait 30, 60 or 90 days - or longer - for invoice payments, companies can receive immediate payment on invoices from a finance company. This works exceptionally well for small- and medium-sized enterprises (SMEs) that need working capital to grow their companies and pay vendors and employees.
Export trade finance can be complicated and much of the information available online is either confusing or wrong. Let’s deal with five common myths.
Myth 1: It’s hard to find a finance provider.
False. While some may believe that trade finance is provided only by banks, the truth is that many alternative lenders have emerged in recent years. Some of these provide online, digital services which make the approval process easier and faster than dealing with traditional institutions.
In addition, the newer financiers are typically more agile, more willing to approve credit to SMEs and more able to finance trade deals that banks can’t – or won’t – consider due to restrictions on risk or geographical location.
Myth 2: Other types of trade finance are more convenient.
False. It’s true that companies often turn to traditional solutions to aid international trade deals but they are not necessarily more convenient. For example, letters of credit – issued by a Buyer’s bank to confirm it will pay a Supplier’s bank – and credit insurance – which protects the Supplier in case the Buyer doesn’t pay – are both time- and resource-intensive to set up. They often require more paperwork than digital invoice financing.
Myth 3: Export financing is complicated.
False. A typical export finance deal may comprise the following steps:
The Supplier ships the goods and invoices the Buyer.
The finance company takes ownership of the invoice and advances a percentage of its value to the Supplier.
The Buyer settles the invoice with the finance company on the due date.
The finance company pays the balance of the invoice, minus any fees, to the Supplier.
Of course, there will be an application and approval process to go through, and some documentation to provide, but invoice financing can be far quicker and simpler than it was in the past.
The above example describes non-recourse factoring (where the finance company protects the Supplier against non-payment) but recourse factoring (where the Supplier is left to chase the Buyer for payment) is no more complicated. Each applicant should take advice as to the type of factoring that will suit their financial planning.
Myth 4: Export finance always puts Buyers off.
False. While some Buyers may hesitate to pay a third-party finance company instead of their Supplier, invoice factoring is such a huge contributor to global trade that most international traders accept it as a normal part of supply chain finance.
The role of the finance company is simply to extend credit to provide liquid capital that would otherwise be tied up for months in unpaid invoices. It takes no part in any negotiations or exchanges between Buyer and Supplier.
Myth 5: Export receivables finance fees are too high.
False. The actual cost of export finance depends on the payment term of the invoice, the amount of credit requested and the creditworthiness of the Buyer. Considering that invoice factoring requires no collateral (the invoice acts as the collateral), has no long-term payment periods, often protects the Supplier against non-payment and can be approved quickly, many Exporters prefer it to a bank loan when managing cash flow fluctuations. Fees are considered quite acceptable by those who rely on factoring to release capital tied up in unpaid invoices.
In addition, invoice factoring can be available even to those Suppliers who would be refused a bank loan because of geographical location or credit history.
If you are interested in learning more about the content listed above, 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.