Why cross-border receivables are different
When a U.S. company sells to a domestic customer on net 30, a factor can run a credit report, call the customer's payables team and, if needed, pursue collection in a familiar legal system. Sell the same goods to a distributor in another country and most of those tools get harder to use. Credit information may be thin or in another language, the buyer's local law governs how receivables can be assigned, and collection means working through foreign courts or agents.
Open account is still the norm in many export markets. The U.S. International Trade Administration's Trade Finance Guide describes open account as a sale where goods are shipped and delivered before payment is due, typically in 30, 60 or 90 days, and notes that exporters who refuse to extend credit may lose sales to competitors who will. That leaves the exporter with three linked problems: waiting for cash, the risk the buyer never pays, and the risk that political or currency events prevent payment even when the buyer is willing.
International factoring addresses the first two directly. It does not, by itself, remove currency risk.
How export factoring works
The most established structure is the two-factor system, run through correspondent networks of factoring companies. FCI, formerly Factors Chain International, is the global network most often associated with it, and its members operate under FCI's General Rules of International Factoring.
- The exporter signs a factoring agreement with an export factor in its own country.
- When the exporter has a prospective buyer, the export factor asks an import factor in the buyer's country to assess the buyer's credit.
- The import factor evaluates the buyer and sets a credit limit.
- The exporter ships on open account and assigns the invoice to the export factor.
- The export factor advances cash against the invoice. FCI describes this advance as generally up to 80% of assigned invoices.
- The import factor handles collection locally, in the buyer's language and legal system, and remits payment to the export factor.
- The export factor pays the exporter the remaining balance, less charges.
The credit protection piece is what separates this from simply borrowing against foreign invoices. Under the FCI model, if an approved buyer fails to pay because of insolvency, the import factor pays the export factor once 90 days have passed after the invoice due date, then continues collection. That protection covers buyers the import factor approved, up to the approved limit; it does not cover disputes over the goods themselves.
Single-factor arrangements also exist, where one factor handles the whole transaction and either collects across borders directly or buys credit insurance on the foreign buyers. These can work well for exporters selling into a few large, well-known buyers.
Import factoring is the mirror image: a factor in the U.S. acting as import factor for a foreign exporter selling to a U.S. buyer. For a U.S. importer, the relevant point is that your foreign supplier may already be using a factor, and your invoices may instruct you to pay that factor.
What export factoring costs
The Trade Finance Guide describes two common arrangements. In discount factoring, the factor advances funds against receivables and waits for collection, and the cost varies with the time outstanding and the amount advanced. In collection factoring, the factor pays the exporter at maturity, less a commission, regardless of the buyer's ability to pay, and the guide says this fixed cost usually ranges between 1% and 4%, depending on the country, sales volume and amount of paperwork.
The same guide notes that the advance rate is generally limited to 80% of factored invoices, that factoring generally does not work with foreign receivables on terms longer than 180 days, and that it is generally a more expensive option that can take a significant share of an exporter's margin. It also states that export factoring is less suitable for new-to-export companies, because factors generally do not take on clients for a one-time deal and want access to a certain volume of the exporter's yearly sales. Use the factoring calculator to test whether that cost fits your margins on a given market.
| Feature | Export factoring | Export credit insurance | Confirmed letter of credit |
|---|---|---|---|
| Who bears buyer credit risk | Factor, for approved buyers | Insurer, after deductible or co-insurance | Confirming bank, if documents comply |
| Provides cash before due date | Yes, an advance | No, but can support a bank loan | Possible through discounting |
| Buyer must arrange anything | No, buyer pays on open account | No | Yes, buyer applies to its bank |
| Typical cost reference | 1% to 4% for collection factoring | Multi-buyer policies generally a fraction of one percent of insured sales | Bank fees, generally higher than insurance per the Trade Finance Guide |
How factors decide whether to take on an exporter
International factors look at both ends of the trade.
The buyers and their countries. The Trade Finance Guide notes that factoring is limited to countries whose laws support buying and selling receivables and is generally not available in developing and emerging countries. A factor's appetite is often country by country, and within a country, buyer by buyer.
Volume and continuity. Factors favor exporters that ship regularly to repeat buyers. The guide identifies continuous short-term sales of consumer goods on open account as the best fit and lists sectors such as agricultural products, textiles and apparel, light manufacturing, raw materials and chemicals, and logistics and business-process services as common users.
Documentation. Expect to provide commercial invoices, bills of lading or air waybills, proof of delivery, sales contracts or purchase orders, and the payment terms agreed with each buyer. Inconsistent documents slow verification and can make an invoice ineligible.
The exporter's own house. Domestic factors still check your liens, tax status and financial condition. If a bank already holds a blanket lien on your receivables, it must agree to release the foreign receivables before a factor can buy them.
Exporters who also sell domestically may factor both books with the same provider or keep them separate. The distribution and wholesale page and the manufacturing page discuss domestic receivables for those sectors.
Pitfalls in cross-border factoring
Currency is still your problem
If you invoice in a foreign currency, the factor typically advances and settles in that currency or converts at the prevailing rate, and the exchange-rate move between shipment and collection lands on you. Export credit insurance also excludes foreign exchange loss, according to the Trade Finance Guide. Forward contracts or invoicing in dollars are the usual ways to manage that exposure.
Disputes are not credit losses
Credit protection pays when an approved buyer cannot pay. It does not pay when a buyer refuses because goods arrived late, damaged or out of specification. Those disputes go back to you, and under most agreements the advance on a disputed invoice must be repaid.
Approved limits can change
The import factor can reduce or withdraw a buyer's credit limit for future shipments if conditions change. Shipments made above an approved limit may be funded with recourse or not funded at all. Check limits before you accept a large order.
Terms beyond the program
Buyers in some markets ask for 120- or 180-day terms. Longer terms raise the cost and may fall outside what the factor will cover. Negotiate terms with the factoring cost in mind.
Whole-turnover requirements
Some agreements require you to submit all receivables from a given country or buyer, not just the ones you want funded. Read the contract review guide for the clauses to look for.
Alternatives to international factoring
Export credit insurance. The International Trade Administration describes short-term policies providing 90% to 95% coverage against commercial and political risks, with most multi-buyer policies costing less than 1% of insured sales. Short-term policies typically cover consumer goods and materials up to 180 days and some capital goods and bulk commodities up to 360 days. Insurance does not advance cash on its own, but insured foreign receivables make lenders more willing to lend against them. Exporters with an EXIM working capital guarantee may receive a 25% premium discount on multi-buyer insurance.
Letters of credit. A letter of credit is a bank's commitment to pay if the exporter presents documents that strictly comply with its terms. Confirmation by a second bank adds that bank's promise to pay, which protects against the foreign bank's risk and the importing country's political risk. Letters of credit suit one-time or high-risk transactions, but they require the buyer to use its own bank credit, and small discrepancies in documents can delay or block payment.
Government-backed working capital. The SBA's Export Working Capital Program gives participating lenders up to a 90% guarantee on export loans up to $5 million, and its Export Express program covers financing needs up to $500,000, according to the Trade Finance Guide. These fund pre-shipment costs such as materials and labor, which factoring cannot. Exporters with a sizable domestic book can also look at the SBA's 7(a) Working Capital Pilot, which offers monitored lines of credit against receivables or inventory up to a $5 million maximum.
Forfaiting. For medium-term receivables on capital goods, forfaiters buy guaranteed or bank-backed obligations without recourse. It is a different market from short-term factoring.
Factoring is usually the wrong tool for a one-off export sale, for buyers in countries without supportive receivables law, for terms beyond 180 days, and for thin-margin commodity sales where a 1% to 4% cost consumes the profit.
Frequently asked questions
What is the difference between export factoring and export credit insurance?
Export factoring gives you cash before the buyer pays, handles collection abroad and, in the two-factor system, protects against approved buyers' insolvency. Credit insurance only protects against non-payment, typically covering a percentage of the loss rather than all of it, and does not provide cash by itself. Many exporters use insurance to make foreign receivables acceptable to their bank instead of factoring. Factoring costs more but bundles financing, collection and protection in one arrangement.
Do my foreign buyers know I am factoring?
Usually yes. In the two-factor system the import factor collects from the buyer locally, so the buyer is told to pay the factor, often in its own country and language. Many buyers are used to this, especially in markets where factoring is common. Some single-factor programs can be structured with less buyer contact, but notification is the normal practice in cross-border factoring because it secures the factor's right to payment.
Can I factor invoices to buyers in any country?
No. Factoring depends on local law allowing receivables to be assigned and enforced, and on a factor's willingness to accept risk in that market. The Trade Finance Guide notes export factoring is generally not available in developing and emerging countries. For buyers in those markets, letters of credit, documentary collections or export credit insurance may be the more practical tools.
Does export factoring protect me against exchange-rate losses?
No. Factoring and credit insurance address whether the buyer pays, not what the payment is worth when converted to dollars. If you invoice in a foreign currency, you carry the exchange-rate risk unless you hedge it, for example with a forward contract, or invoice in U.S. dollars. Ask any factor how and when it converts foreign-currency collections, because conversion timing affects what you receive.