Recently, I have received questions on what foreign receivables financing can provide, the differences between factoring and forfaiting, and other international financing option questions. To answer these, Elizabeth Hastings with FGI Finance has provided an article that may help delineate some of these differences…
While working with customers in foreign jurisdictions can generate substantial rewards, such trade also comes with great complexities that are uncommon in domestic transactions. One must consider foreign credit, political, currency, extended payment term and legal enforcement risks before engaging in business abroad. Despite the aforementioned challenges, the number one difficulty in cross border transactions is finding a lender who understands these risks, yet is still willing to provide the working capital needed to fund foreign transactions. Cross border financing is often the key factor in growing or turning around an international business.
What are some of the common solutions for financing cross border transactions?
US banks often exclude international sales from the available borrowing base unless the client obtains credit insurance or working capital guaranty through the Export-Import Bank of the United States (Ex-Im) or through private insurance providers. While each seems a viable option, each carries its own restrictions. Although Ex-Im is designed to promote trade between the US and foreign countries, it has certain exclusions including, but not limited to, the suppliers’ locations and the buyers’ countries. Another issue to consider with Ex-Im is the extensive underwriting process that may take months to obtain approval for a transaction.
Private credit insurance also has its downfalls. Insurance providers help exporters extend competitive payment terms by protecting their foreign receivables against almost all non-payment risks. Almost is the operative word here, as it is limited to political and insolvency risks. It is important to remember that an insurance company can decline or reduce coverage at any time.
Both insurance options can prove costly and time consuming. Also important to note, is that if the insurance policy is cancelled, subsequently the loan will be as well, leaving nothing to show for the time and hard work obtaining this loan in the first place.
What are some of the most effective solutions for cross border financing?
Confirming, Forfaiting and Factoring are the most effective solutions for cross border financing.
Confirming is a financial service in which an independent financial entity offers to discount an export order in the seller’s country and makes payment for the goods. For the exporter, confirming means that the entire export transaction from the manufacturing to the delivery stage is coordinated and paid for over time by the bank. This type of financing is available in Europe, mainly in Spain, and has yet to be adopted in the US.
Forfaiting is the selling of long term promissory notes or negotiable instruments of the foreign buyer. These instruments may also need to carry the guarantee of a foreign government or a highly rated bank. Forfaiting is often used in medium and long term transactions and is normally very paperwork-intensive.
Factoring, another popular solution for cross border financing, is the discounting of a foreign account receivable and is used in short term financing. In the factoring of foreign accounts receivable, the exporter sells its foreign accounts receivable to a factoring company for cash at a discount from the face value. Factoring of foreign accounts receivables is less frequently used than factoring of domestic receivables.
Factoring of foreign accounts receivables is complex and only a few banks and firms have the knowledge to work with such complex asset classes. Factoring of foreign receivables requires extensive knowledge with foreign laws, advanced understanding of previously highlighted risks and building an effective platform to manage it all.
As the world opens its borders through the use of Internet, financing solutions for open trade continue to evolve. My advice is to always seek a lender that is knowledgeable in foreign transactions and who can take your business to the next level. Seek a lender who has experience in foreign markets, in all of its complexities and one who is willing to partner with you to achieve your goals while mitigating risks.
About the Author: Elizabeth L. Hastings is a Senior Vice President of Business Development at FGI Finance (www.fgifinance.com), global commercial finance group with offices in New York, Dallas, Chicago, and Los Angeles. Ms. Hastings sits on the board of the Dallas CFA. She is a member of ACG, TMA, WFE, the Finance Forum, and the International Factoring Association. She can be reached at the Dallas office at 214.295.3216 or ehastings@fgifinance.com.
