In a 2019 report the World Trade Organisation estimated that the ‘vast majority’ of the United States’ $23 trillion in annual global trade relies on some variety of financing or guarantee between buyer and supplier.
During the past year and a half, the COVID-19 crisis has complicated the relationship between buyer and supplier by disrupting the economy and global supply chains. India and China saw growth in exports weaken over the course of 2019-2020. Similarly, services exporters in Brazil recorded negative year-on-year growth in three out of four quarters.
The pandemic underlined how important digital operations are in keeping trade flowing. Technological innovation continues to be a driving force for successful international e-commerce and trade, and is helping companies bounce back.
For suppliers of export goods, digital trade financing encompasses a range of services: bank working capital loans and letters of credit; invoice financing, which involves either advances against accounts receivable or outright selling of invoices to a financing company (factoring); or even payment guarantees such as credit insurance.
There’s a high demand for trade financing. However, the option is not always available to small or medium exporters. The Asian Development Bank calculates the unmet demand for trade financing to be $1.5 trillion globally, with exporters in Asia feeling the most acute need for solutions to solve their working capital crunches. So, when should you use international invoice financing?
In this post we’ll explore:- What is International Invoice Financing?
Hopefully, as you learn more about international invoice finance and the scenarios where it is applicable, you will be able to understand how you can use it to help your business too.
Invoice finance solves a classic dilemma in international trade. A supplier wants to get paid at the time the goods are shipped. On the other hand, the buyer prefers open account payment terms that leave time for receipt, distribution, and the sale of goods. This time lag prompts the need for credit facilities of up to 120 days, which is a market of over $10 trillion annually according to the Bank for International Settlements.
In a typical invoice financing transaction, the supplier sells invoices to a finance company at a discount at the time of the shipment of goods. The supplier receives payment upfront and, in cases of non-recourse factoring, payment is guaranteed because the risk of buyer non-payment due to bankruptcy is transferred to the financing company.
Invoice financing is a standard solution for domestic trade in many countries and is gaining more attention in cross-border trade. Figures from FCI, the largest industry group for the open account receivables finance industry, show that international factoring volumes grew 5.4% from 2018 to 2019. While global factoring volumes dropped in 2020 as a result of the pandemic, we are already beginning to see a return to a state of normalcy. In particular the North East Asia region has become an active trade finance centre and is at the forefront of the upward trend for invoice financing.
One reason for the return to stability and growth is that invoice financing is a quick and straightforward solution to implement, and can be used in conjunction with bank loans. It is also flexible, allowing the supplier to control the injection of working capital by choosing when and which invoices to sell.
While many companies rely on account receivables financing for their everyday working capital needs, three instances stand out as especially conducive to this form of trade liquidity.
Fast-growing companies often have capital needs that surpass their bank lines of credit or loans. For these firms, accounts receivable are an asset that can be quickly converted to cash with no impact on the bank relationship. Invoice financing is the most straightforward way to get supplemental financing to accept and fill more orders.
This is especially true for companies operating in sectors with high seasonal needs like apparel and holiday products. Seasonality can cause large fluctuations in a company’s cash flow, inventory and profitability, distorting the financial ratios that banks use to make lending decisions. Invoice financing provides supplemental working capital during these peak times.
Almost all international companies have experienced a turnaround situation in the past year because of the pandemic. Disruption – quickened on many fronts by COVID-19 – is here to stay and has become a new economic driver.
Businesses in “turnaround” are those businesses returning to growth after a period of poor performance caused by an external shock such as a pandemic, or a recession or internal restructuring of finances or management. Firms in turnaround find themselves at an impasse: even though prospects are good, the company’s financials might not merit a full bank loan program. But financing is often needed to take advantage of growth opportunities.
Invoice financing can be a lifeline for companies in these situations. This is possible because in invoice financing, the finance company bases its credit decision on the financial health of the buyer, not the exporter. Invoice financing can give businesses a vital injection of funds during a time of recovery when many other options are unavailable.
Since the 2008 financial crisis, banks have been stepping back from cross-border trade activities. The pandemic has also increased the strain on cross-border trade measures. Regulatory constraints have grown, the paperwork burden is costly and cuts into profits, and geopolitical risks have become more volatile.
This environment gave rise to the $1.5 trillion trade finance gap, which has acutely impacted firms in the middle market. These companies turn to invoice financing when their bank cannot support sales to a particular jurisdiction. Non-bank players like Stenn are able to step in and offer options to companies left behind by banks.
Invoice financing has found its place as a viable option for exporters of goods. With no long-term contracts and no requirement to factor all invoices, factoring became another option in the working capital toolbox, alongside services from traditional banks.
We encourage you to explore financing solutions that suit your business. For small and medium-sized businesses looking to expand and operate on the global stage, international invoice financing is one of the best options to consider, especially in this post-pandemic economic climate.
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