With increasing frequency, U.S. exporters are turning to a financial strategy that makes global trade less risky, and more accessible and cost-effective than ever before.
International factoring — the sale of accounts receivable to international financing companies with the resources to manage trade risk — is enabling plastics companies to generate sustainable earnings growth by taking advantage of growing demand in international markets.
In the past, plastics companies simply conceded these attractive international opportunities to large multinational companies with overseas affiliates and large reserves of operating capital — primarily because of the complexity, difficulty and expense of accessing world markets.
In developing their export trade financing strategies, plastics companies have several options to consider. The three traditional methods — cash in advance, bank letters of credit and credit insurance — are all effective, proven strategies for facilitating cross-border transactions, but each has significant limitations.
In the first case, customers are less likely to cooperate because most seek open-account relationships and would object to payment before delivery. Letters of credit can effectively protect the interests of the seller, but they ultimately diminish selling power because they place a significant administrative burden on the buyer. Plus, confirmation is not available in all countries, and disputes can be difficult and costly to resolve.
Credit insurance usually does not provide full coverage, and exporters face additional credit risk through deductible and/or insurance copayments. Further, it does nothing to speed collection. Finally, most insurers require exporters to take direct responsibility for customer credit investigations and to prove their claims.
International factoring has emerged as an attractive alternative, because it addresses the needs of both plastics exporters and their customers.
By selling their accounts receivable to international factors, companies can strengthen their selling power and solidify trading relationships by offering their customers the open-account terms they prefer.
Companies can also sidestep the credit risk and much of the administrative burden of global trade, because the factor assumes the credit risk and handles difficult and complex processes such as international credit investigations, collection of international receivables and remittance of the proceeds directly to the exporter.
Exporters also are drawn to factoring because it gives them the flexibility to choose the specific financial products and services — receivables management (including bookkeeping and collection), 100 percent credit protection and receivables financing — best-suited to their export program and financial situation.
Companies might expect to pay a steep price for factoring services, but direct comparisons between credit insurance, letters of credit and factoring suggest otherwise.
Consider the hypothetical case of a manufacturer, with yearly overseas sales of $10 million, that ships to 50 overseas buyers with an average order and invoice size of $75,000 and maximum payment terms of 90 days. With credit insurance, the exporter can extend open-account terms to its customers and receive 90 percent credit coverage, the maximum available, for $191,000, assuming a 0.6 percent credit loss. However, actual charges if a credit loss occurs could raise an exporter's credit insurance costs considerably.
With letters of credit, the costs are borne by the buyer, in this case $194,350 — not counting the internal administrative costs for both the exporter and its customer. The exporter receives a certain comfort level, but the considerable cost to the buyer can put the exporter at a competitive disadvantage compared to other sellers offering open-account terms.
With factoring, however, the exporter is fully insulated from credit risk — and can offer open-account terms — for a fee of $175,780.
At a time when competitive pressures are making sustainable growth difficult to achieve, international factoring offers plastics exporters a practical, cost-effective strategy for penetrating global markets.
Tarter is vice president of international business development of Heller Financial Inc.'s Current Asset Management Group in Glendale, Calif.
