Last Updated on August 3, 2023
In the import and export industry, you often have to wait weeks or even months to get paid. Unfortunately, business expenses often require immediate attention, meaning you may need to sacrifice assets or equity to pay them off. Late customer payments can then cause your company to fall into a cycle of negative cash flow and mounting debt.
To grow your import-export company, you need cash to make payments, bring in new products, and meet payroll obligations – this is where international invoice factoring comes in.
In this article, we discuss how invoice factoring for import and export companies works, its benefits, and how factoring compares to other financing alternatives. Read on to learn how you can benefit from international factoring services!
What Is International Factoring?
International factoring is a way to receive cash advances by selling your invoices to third-party companies, like altLINE (although, altLINE does not offer international factoring services. Click here for a list of industries we do serve).
Import and export companies often get paid through invoices, so there may be delays in receiving payment, which leads to negative cash flow that may hurt your business. International factoring is usually used to unlock working capital when you need it, reducing your reliance on customer payment timelines.
Benefits Of International Invoice Factoring
Invoice factoring in international trade is a great way to unlock extra funds when customers take a long time to settle their bills. Below are some of the main benefits of invoice factoring for international export and import businesses:
Get Your Accounts Receivable Invoices Paid In Days, Not Months
The best international invoice factoring companies can fund your invoices in 1 or 2 days. This means you will get up to 90% of your hard-earned money as soon as possible instead of in 30, 60, or even 90 days.
Access Capital To Grow Your Business While Maintaining Equity
For business owners, sacrificing equity is sometimes necessary to fuel company growth. However, invoice factoring can set them both up for long-term success. Invoice factoring gives you the money necessary to fund business growth, pay expenses, and fulfill payroll obligations without sacrificing valuable equity.
Get Cash When You Need It Most
Late customer payments and overdue invoices create low cash flow situations that may hurt your business. Improving cash flow through invoice factoring ensures your company stays financially healthy, even when customers delay payment.
How Does Import-Export Factoring Work?
Import-export factoring services work by turning unpaid invoices into cash advances – these help you finance company initiatives and promote business growth. Additionally, submitting invoices to a third-party factoring company softens the financial blow of late customer payments. Instead of waiting on customers to pay their invoices, you can use our services to get cash whenever you need it.
More specifically, here is a step-by-step guide for applying for export factoring services. These steps will be more-or-less the same for invoice factoring across other industries, such as factoring for staffing or professional services.
1. Submit Your Unpaid Invoices
International factoring companies typically accept all types of invoices. Generally, if your customers are creditworthy and established companies, a factoring company will accept your invoice. On the other hand, you may have trouble finding a factor who will buy invoices from customers with a history of debt delinquency.
If your invoice turnover time is between 30 and 90 days, your receivables are well-positioned for factoring.
2. A Factoring Company Advances Up To 80-90% Of The Invoice Face Value
You should expect a factoring advance rate of 80-90% of your invoice’s face value before receiving the cash advance within 24 to 48 hours after submission. The exact timing of receiving your cash advance may vary a bit depending on when your customers receive the goods.
3. The Factor Collects Payment
A good factoring company will help collect invoices by providing a secure lockbox for customer payment and reporting collections progress through an online customer portal. If issues arise, the factor should communicate with your customer to resolve those issues professionally, ensuring you maintain good business relationships.
4. The Factor Pays Out The Remaining Unpaid Invoice
After the invoice has been paid and processed, the factoring company releases the remainder of the funds, minus a small factoring fee (usually 1-5%).
Uses For Your Factoring Cash Advance
Receiving cash advances from utilizing international invoice factoring means you do not have to wait on customer payments to fund your business. Instead, you can avoid long payment cycles and unlock growth capital sooner to accelerate business development.
Here are some ways you can use international factoring cash advances:
Negative cash flow due to late invoices causes delayed payroll, which reduces productivity and morale. Invoice factoring cash advances ensure you can pay employees on time, improving your employees’ overall satisfaction.
Take On New Orders
You should not be forced to wait for customer payments to clear to take new orders, buy business necessities, and grow your business. Invoice factoring provides cash advances to buy business necessities and take new customer orders without sacrificing assets and equity.
Pay Operating Expenses
Running an import-export company is not cheap – you must pay transport costs, legal fees, and other expenses to stay in business. Direct export factoring helps you get the necessary cash to pay these obligations without sacrificing assets or equity.
Import-Export Factoring vs. Other Funding Options
In addition to international factoring, your business has a few other funding options. How do these alternatives compare to international factoring? Here is a breakdown and comparison of alternative financing methods:
International Factoring vs. Bank Line Of Credit
Most import-export companies seek a line of credit as their first financing solution. In some situations, import-export companies may have an easier time qualifying for a line of credit, but the funds it provides may not be enough to grow their business.
Banks approve your line of credit and set its limit by looking at your fixed assets. Companies with many fixed assets generally receive a higher lending limit and are more likely to qualify. If your company is still building its asset portfolio, you may not qualify for a line of credit easily.
In that case, factoring international bills may be better because financial companies look at your customers assets and credit instead of your assets to determine funding eligibility. If you work with an established customer base, factoring companies will give you enough working capital when banks cannot.
International Factoring vs. ACH/MCA Loans
ACH (automated clearing house) and MCA (merchant cash advance) loans provide funding based on a bank statement review. These loans only take one or two business days to provide funding, which makes them popular among businesses.
Unfortunately, ACH and MCA loans come with high interest and lender fees that can reach 60% of your initial loan. If you mismanage these loans, you may jeopardize your company’s finances and be stuck trying to figure out how to get out of a merchant cash advance.
International factoring is typically safer for your company because you get funding from your invoices, which customers will eventually repay. Because you are almost guaranteed repayment, you can focus on running your business without stressing over debts.
International Factoring vs. Early Payment Discounts
You can encourage customers to pay quickly by providing early payment discounts for early invoice repayment, accelerating your cash flow when needed. However, this method does not always work because customers have different priorities.
If customers prefer having more cash on hand or think a discount such as 1/10 net 30 is too low, they may ignore the offer and pay their invoice as scheduled, leaving you low on cash and unable to grow your business. Therefore, this method is not very reliable if you need an urgent cash boost.
International factoring is typically more reliable because you are guaranteed a cash advance if your invoices are approved.
Typical International Factoring Rates And Fees
Invoice factoring fees depend on how much you plan to factor and how long customers take to pay. Factoring higher amounts and getting customers to pay faster usually lead to lower fees. We may also consider things like your business tenure, customer base diversity, and overall customer credit quality.
We charge two types of factoring fees:
- Initial fee: This fee pays for your invoice factoring expenses for a set initial period of time (typically the first 30 days) and costs 0.90-3.50% of your invoice’s face value.
- Incremental fees: These fees cover all expenses after the initial fee period, costing 0.25-1.50% of your invoice’s face value.
Requirements To Apply For International Factoring Services
Planning to apply for international factoring services? Here is what you need to have handy to ensure eligibility:
List Of Existing And Potential Customers
As part of the qualification process, factoring companies need the names and contact information of all existing and potential customers. This list is used to review their credit quality and decide factoring eligibility.
You need to complete a form when applying for international factoring. Enclose these documents alongside your application:
- Business ownership identification
- Personal identification
- Employer Identification Number
- Customer contracts
- Articles of incorporation and other relevant corporate documents
Accounts Receivable Aging Report
An accounts receivable aging report records outstanding invoices categorized by their due dates. We need this document to research customer payment behaviors and determine whether they are eligible for factoring.
For example, altLINE will accept invoices that are 60 to 90 days outstanding if the customers have a history of paying on time, but risky customers’ invoices may be ineligible for factoring.
Businesses We Fund And Finance
While altLINE does not provide invoice factoring services to all kinds of import-export businesses, we do factor invoices for companies across a variety of industries. Here are some example businesses that can benefit from our services:
- Staffing agencies
- Medical receivables
- Wholesale and distribution
- Government contractors
- Professional services
- Consulting firms
- Many other small businesses
FAQs About Factoring For International Import-Export Companies
Here are some common questions about international factoring answered:
Do international factoring companies need to run a credit check before getting started?
While running a credit and background check on import-export company owners is standard, there are typically no minimum credit thresholds for approval. Background checks are reviewed for financial-related crimes or felonies. In the event a borrower has a spotty background, approval may be in question, but if the borrower is disqualified, a factor may work with the willing borrower to identify a different international factor that could provide funding.
Are UCC filings required when factoring international invoices?
A factoring company like altLINE will file a UCC on the client’s business, but since we do not offer factoring services for import-export companies, you will have to ask your lender before the process begins, as it may vary from factor-to-factor. Do know, however, that UCC filings are commonly seen as an integral part of any form of lending.
Is international factoring a debt or loan?
International factoring is neither debt nor a loan. Invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers.
However, if you’re working with a recourse factor, you may need to pay the cash advance back if your customer fails to pay their invoice. This is why it’s important to understand the difference between recourse factoring vs. non-recourse factoring.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.