When Does Invoice Factoring Make Sense For Exporters?

SME exporters can often find the process of selling to international customers a little overwhelming. Language problems, time-zone differences, and cultural issues can complicate an overseas transaction.

In addition to this, a large proportion of export sales are conducted on “open account”. This involves the importer receiving goods first and paying later. The money due to the exporter is usually paid in 30, 60, or 90 days.

While this is an advantage for the importer, it leads to the seller’s funds being blocked. There could also be a situation where the importer delays payment or even fails to pay.

Invoice factoring provides an ideal solution

In many instances, the only way an exporter can bag an order is to agree to open account terms. But this can lead to blocked payments and a shortage of working capital.

Invoice factoring can be a good way out. It allows the exporter to receive funds within a few days of shipping goods. The transaction works in the following manner:

• An exporter would approach an invoice factoring company and provide details about the overseas buyer and the goods that are being sold.
• The invoice factoring company would carry out a credit appraisal of the importer and establish a limit for financing.
• Goods would be shipped and the documents provided to the factoring company.
• Payment of 80% of the invoice value would be made within a few days to the seller. This would usually cover the exporter’s costs.
• On the due date, the factoring company would collect the amount due from the importer. This would be paid to the seller after deduction of the charges that had been agreed to.

In addition to freeing up an exporter’s working capital, the invoice factoring transaction has several other advantages. The administrative hassles of collecting money from the importer are handled by the factoring company.

Even the credit risk is borne by the factoring company. In most circumstances, the seller would receive complete dues even if the importer defaults in payment on the due date.

Grow your export business with invoice factoring

Getting immediate funds from export sales can be a game changer for SME exporters. The cash that you receive can be used to fulfil new export orders. You can then discount the invoices that you raise for the new sale transaction as well. In this manner, you can quickly boost your export turnover.

With experts from the invoice factoring company handling the paperwork and even taking responsibility for the credit risk, you can concentrate on what you do best — hunt for new business and expand your overseas sales volumes.

About Drip Capital

Drip Capital is a trade finance company headquartered in California, USA. We offer finance to Indian exporters selling to buyers in North America, Europe, Middle East and Asia Pacific. Established in 2014, Drip Capital has built a strong presence across India having financed hundreds of shipments across industries such as textiles and garments, packaged and frozen foods, metals and engineering goods. With focus on SMEs, we have provided our clients timely access to working capital and helped them grow their exports by as much as 60% in less than a year.