There are a lot of benefits to a business selling receivables overseas, but there can also be a lot of financial risks as well. It is important to fully understand the risks and how they may affect your business before selling overseas.
Export Finance is ideal if your business has customers overseas who have extended payment terms, or you experience issues collecting payments when exporting abroad. When you receive an order to supply goods or services to a buyer overseas, you can ask to be paid up front – at the time the buyer places the order, or before the goods and services are delivered if you need time to make the goods.
If your business isn’t paid on time it can impact on cashflow and create a funding gap when it comes to paying your staff or suppliers, or not being able to invest in new opportunities. You’re therefore faced with a few options, we look at the pros and cons of each and when to ask for them.
Option 1: Ask for payment up front
It’s the method that your finance team will want to go for. There is no payment risk, you get paid up front, and you can use your client’s money to finance production of the product you’re selling.
This approach might limit your options on which companies or the type of businesses that will work with you. Remember, when you enter into a new market, not only will you be competing with other exporters you’re also going to be competing with domestic companies who are likely to offer credit terms.
From your client’s perspective this is the riskiest and one of the most expensive methods of payment. They have to give up use of their cash and have no assurance that you are actually going to ship them what they ordered.
The end result is very negative marketing implications for you. Most businesses will not work in this manner, particularly with new suppliers.
Option 2: Offer credit terms
Most buyers these days need credit from their suppliers. For example, a buyer might be unwilling to place an export order unless it is allowed to pay for the goods or services only when they have been delivered. This means that the exporter has to offer credit for 30, 60 or 90 days, or however long it takes for the goods to arrive, before the buyer will pay and the exporter will receive payment.
You’re going to give a competitive advantage. Remember, when you’re exporting you’re competing with both exporters and domestic companies who may be used to giving credit terms.
When an exporter gives credit to its buyer it faces 2 particular problems:
It has to wait for its money – this affects its cash flow.
It is exposed to the risk that the buyer won’t or can’t pay for the exports – for example, between the time the exporter ships the goods and them arriving at the buyer’s premises, the buyer may have gone bankrupt and be unable to pay. This could then lead to the exporter becoming insolvent if it involved a large sum of money.
Option 3: Use Export Finance
Export finance offers a way for businesses to release working capital, specifically from overseas transactions, that might otherwise remain tied up in receivables for long periods of time.
You can proactively manage your cash flow.
You know your receivables will be funded upon shipment, rather than having to wait out the delivery and processing time.
Export Finance often comes hand in hand with bad debt protection, so you’re covered in the event of insolvency of your customer. At Accelerated Payments every individual receivable that we finance has credit insurance already included in the price.
You won’t waste time chasing payments for overdue receivables.
You may not be able to use it with all of your export clients: those in sanctioned countries are unlikely to be covered by the finance provider.
It can be expensive: the level and price of finance depends on the credit worthiness of your customer. So if it’s in a risky country or is not financially stable it could cost you. But it’s still going to be less than the cost of you NOT getting paid.
Disputes are still handled outside of the financial arrangement.
There are limited numbers of finance providers who provide export finance at a price level that is suitable for SMBs. Accelerated Payments is one of them – feel free to get in contact with us to discuss your export funding needs. We’re happy to talk through any prospective or existing clients and see whether we can help you!