3 Reasons Indian Exporters should use Online Factoring Platforms
And ditch traditional factoring providers
Invoice Factoring is a popular way of acquiring funds for Indian exporters that don’t have access to hard collateral. However, most traditional factoring providers have cumbersome processes that limit the benefits for an exporter.
To address this issue, a new category of fintech startups is emerging in India. Though these startups are similar to traditional factoring service providers, their smart use of technology makes the lending process simple, swift and transparent. The total cost of factoring is cheaper, which means more capital to fuel the company’s growth.
Let’s look closely at a few advantages of using a new fintech startup, like Drip Capital, for invoice factoring as compared to the traditional players.
Traditional Factoring Providers (may) have Hidden Costs
When dealing with a traditional factoring provider, you can expect three different elements in the fee structure -
- Processing fee — One-time fee, ranges from 0.4% to 1% of the Total Credit Facility Approved.
- Factoring fee — Charged for each invoice, ranges from a low of 0.4% of Net Invoice value to a high of 1% of Net Invoice value.
- Interest — Calculated on the Actual Number of Days for which the finance facility is utilized. Ranges from a low of 4.5% per year to 9% per year.
However, there are other ways a traditional factoring provider may bill your business. At times, these costs are hidden in the long contracts of fine print.
It’s possible that you may not notice these costs on every invoice but they can add up to a significant amount at year end.
You need to watch out for the following “hidden costs” —
- Origination Fee: Upfront costs associated with starting a new factoring relationship.
- Service Fee: This is like a flat fee, charged monthly to keep an account for your buyers to pay their dues to
- Collection Fee: Some factors may charge you for the effort in collecting the dues, especially beyond the agreed credit period of 90/120 days
- Unused Credit Line Fee: Charges for the unused portion of factoring credit for any month.
- Renewal Fee: You may be asked to pay an amount annually to keep the relationship going.
- Transaction Fee: You may be charged a fixed amount every time an advance is issued
- Buyer Check Fee: A factor may charge you for any credit checks they need to conduct on your clients
In contrast, the pricing at Drip Capital is simple and transparent for exporters.
We charge a setup fee to start the relationship, a discounting fee on each invoice and an interest on the actual number of days factoring is utilized for.
Total fee comes out to be ~ 1% of an invoice value for almost every industry. Of course, we work out the exact fee structure at the start of any relationship and our clients don’t get any surprises thereafter!
(Check out Drip Capital’s Interest Calculator)
Traditional Factoring takes time, effort and paperwork to manage
Invoice factoring is often not the main business unit for traditional financial institutions, albeit one of their many financial products. Dealing with traditional factors is similar to managing banking relationships.
You need to have all your documents sorted and up to the mark. Your clients need to be verified as reliable buyers. There’s to and fro of documents, dialogues and negotiations. It all takes up valuable time. It may take 30 odd days to get started and then significant effort to manage the work of factoring every invoice.
This isn’t a great situation to be in.
You want to just sell your invoices, without going through the whole, elaborate process every time. And this is where online factoring platforms are really making a difference.
For example at Drip Capital, factoring is a simple three-step process.
The setup process is completed within 7 working days. You’ll get access to an online dashboard, where you can manage the invoices. Once you mark an invoice for factoring and submit relevant documents, Drip Capital provides you an advance up to 80% of the invoice value within 24 hours.
Traditional Factoring Providers may not be familiar with your industry
Factoring providers need to engage with buyers in the importing countries and collect the payment on an exporter’s behalf. One has to deal with cultural barriers, language differences, different time zones. It’s quite possible that a factoring provider nudges your clients too much and strains the business relationship.
There’s a lot that can go wrong.
With business relationships at stake, you want factors that understand your industry and are well versed with the business environment of the importing countries.
Traditional factoring providers have fallen behind in building these specializations and relationships over the last few years.
At Drip Capital, we’ve provided over $150 Million as factoring payments, specializing across 4 exporting industries — Garment and Textiles, Processed/Packaged & Frozen Food, Engineering Products and Agro Commodities in the last two years. In the same period, we’ve built relationships in 100+countries that import from India.
It is the perfect time for Indian exporters to evaluate their relationship with traditional factoring providers. New age fintech startups are laser-focused on making factoring easier, unlike traditional providers who are juggling between multiple financial products.
For example, Drip Capital is an invoice factoring platform built exclusively for Indian Exporters. Our focus is on building a product that facilitates international trade.
Are you an exporter? Wondering if online factoring platforms are good for your business?
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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.
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