What is Export Factoring
Businesses involved in international trade often face a liquidity crunch, which renders them incapacitated to meet day-to-day financial requirements. This scarcity also hinders its supply chain management and downsizes the growth of an organisation. So, business owners opt for sources of external financing, like export factoring, to ensure that their businesses remain afloat and operations uninterrupted. Read more
What is Export Factoring?
Export factoring is a financial solution available to exporters, wherein a financier or factor extends cash at a discounted rate to a firm against the purchase of its receivables. It is the summation of export working capital financing, credit protection, foreign accounts receivables bookkeeping, and collection services. Typically, a financier offers 80% of the invoice value to a firm after it enters into an agreement with it. This financier also assumes the risk of default on payment by an importer.
It is best suited for an organisation that exhibits the following characteristics -
- The firm is an established exporter.
- It wishes to have the flexibility to trade on open account terms.
- It wants to outsource credit and collection responsibilities.
- The business seeks to eliminate the inherent risk of non-payment on export sales.
- It aims to maximise cash flow, particularly during periods of rapid growth.
Types Of Export Factoring
There are two kinds of export factoring
Here, the financier pays an advance to exporters against the receivables before the funds are collected from an importer. The cost of this funding depends on the tenure and volume of discounting.
With this facility, the financier pays the exporter at the time of maturity of receivables after deducting a commission. This eliminates the risk of non-payment by the importer during maturity.
Export Factoring Process Flow
The process is initiated, when a business sells its receivables and assigns them to a financier. In return, the financier immediately fulfils the cash requirement of this business. This transaction facilitates better financial planning for a company, which the business owner leverages to reduce credit burden.
This process can be summarised as below -
- The exporting business sells goods to an importer.
- This exporter then raises an invoice on the importer.
- An agreement takes place between these two parties, wherein the importer agrees to make payment at the end of the credit period.
- To avail export factoring, the exporter sells the receivables to a financier.
- This financier then grants a certain percentage of invoice value upfront to the exporter.
- When the maturity period ends, this financier collects payment from the importer.
Benefits Of Export Factoring To A Business
Export factoring presents several short-term as well as long-term benefits to a business, such as -
Immediate Cash Injection
The exporter avails immediate funds on the sale of invoice receivables to a factor. This upfront disbursal satisfies instant cash requirements of businesses. An immediate injection of cash allows a smooth flow and functioning of a business.
Improved Cash Flow And Working Capital
Export factoring ensures that a business can maintain a healthy cash flow. An influx of cash offers businesses access to capital so that they can procure raw materials or invest in expansion.
The financier assumes the responsibility of collecting receivables from the importer. Therefore, the exporter enjoys exemption from the collection of this payment, which allows him to focus on other business activities.
In export factoring, the financier guarantees payments from importers. The exporter, in this case, need not bear the default of payment by importers.
India’s export sector is progressing steadily. Businesses must keep pace with this development and sustain tough competition. A company that offers open account transactions can surpass its competitors and stay ahead in the marketplace.
Export factoring eliminates the hindrances of international trade for domestic entities. As a result, a company can operate on a global market with ease, which accelerates its operations, expansion and growth.
Current Demand For Export Factoring
Cash credit and overdraft facilities are not easily accessible financing alternatives in the global market. Therefore, factoring stands as a preferred source of financing. In India, borrowers still prefer cash credit and overdraft facilities as more acceptable sources of funding. Debtors have apprehensions about accepting an assignment and show an unwillingness to pay directly to borrowers. Additionally, export factoring does not get sufficient push from the banking sector of the country.
Export factoring services in India are offered by NBFCs, which are essentially financed by banks. Banks levy a high rate of interest on these NBFC factors, which in turn charge additional interests from borrowers. Therefore, businesses receive export factoring facilities at a very high rate of interest. Additionally, factors or financiers usually look into the sales history of a firm before entering into an agreement. So, export factoring is ideally suited to established exporters, with a significant business vintage.
KredX GTX is a cutting-edge digital platform specifically crafted to meet the diverse financing needs of Indian companies engaged in global trade. Utilizing advanced technology, this groundbreaking exchange simplifies and accelerates the funding process, providing businesses with timely and tailored financial solutions to support their international commerce activities
The evolution of export factoring is not just a financial innovation; it's a strategic enabler for businesses aiming to scale in international trade. This aligns seamlessly with India's growing stature in the global economy, further facilitating the nation's aim to expand its export footprint. Thus, export factoring, especially through digital platforms like KredX GTX, is poised to be a cornerstone in the growth story of India's international trade, catalyzing business expansion, and contributing significantly to the nation's economic prosperity.