International markets can provide an untapped revenue stream for your business, but international trade into the U.S. carries a higher business risk than selling in a domestic market. It’s simply a bigger challenge to handle issues from abroad than locally. Your international business could run into problems like not understanding U.S. laws, dealing with time zone changes, language barriers, and more. Thus, you’ll want to make sure you are protecting yourself from risk when dealing with international markets. Your best bet for hedging your risk while exporting to the U.S. is to find a local partner, like a factoring company, you can work with to ensure you get paid.
#1 – Check the credit of your importing client
Problem: Conducting business across borders can lead to a multitude of challenges, but one of the biggest is fully understanding the credit worthiness of your importer. Without on the ground presence or the capacity to check business credit history, you could end up conducting business with an importer that doesn’t pay bills, is under litigation, or worse has a criminal history.
Solution: Use a finance company local to your importer, like Cultiva Financial, to check to see whether the importer is a credit risk before you decide to work with them. Checking a potential customer’s credit can help you to decide whether or not they are likely to pay what they owe. A factoring company can do this work for you so you don’t have to worry whether or not your customer is likely to pay their invoices — and protect your cash flow.
#2 – Create a safety net with export credit insurance
Problem: The importer places an order but refuses to pay what they owe. Foreign buyers can refuse to pay for a multitude of reasons, like they can’t afford the bill or their company is dissolving. The risk of non-payment by a customer is one of the biggest issues exporters face. Lost payment on a single invoice could cause a small business’s income to collapse.
Solution: Work with a finance company like Cultiva Financial that provides export credit insurance as part of their financing program. Ultimately, purchasing export credit insurance can help protect you against non-payment, importers going bankruptcy, or even a foreign political disturbance.
#3 – Work with a local company for collections
Problem: Late payment is more of a short-term issue than outright refusal to pay, but it can easily have a negative effect on your company’s cash flow and profitability. If you’re waiting 45 days or longer for your customer to settle the invoice, you are likely leaving goods and services on the table that could help take the next step for your business.
Solution: Work with a finance company like Cultiva Financial that can pay you as soon as the goods are approved by the importer. This service is called international factoring, or invoice factoring and it is defined by the selling of the invoice in return for immediate payment. By selling the invoice as an asset, the finance company ensures you will get paid while they take on the burden of collections from the client. When you decide to factor your foreign trade invoices, the finance company pays you as soon as goods or services are approved upon import, increasing cash flow and profit. Often, the money will arrive in your account within 24 hours of approval— and sometimes as quickly as a couple of hours.
#4 – Insure your product during transit with All-Risk Cargo Insurance
Problem: Whether your exports are perishables or non-perishables, there’s a risk of your product getting blemished or ruined during transit. Issues like bad weather, lengthy storage periods, rough handling by port employees, or theft can damage your product. Packaging your products appropriately can help, but you may not be able to prepare for every contingency.
Solution: Buy cargo insurance — specifically all-risk insurance. This type of insurance covers your product against damages in all cases when shipping to foreign countries, except in instances of war or civil unrest. It covers the cost of your lost products, as well as the time you spent managing the damages. You can also consider getting general average insurance, which will cover your portion of other people’s losses in cases where maritime law requires you pay before you receive your cargo.
#5 – Secure your exchange rate with a Forward Contract
Problem: When dealing with a foreign currency, exchange rates can change and take a chunk out of your profits. If the U.S. dollar drops in value, you will receive less money after the funds are exchanged — for the same purchase order.
Solution: Negotiate a forward contract with a financial institution or provider that exchanges money. A forward contract allows you to decide a predetermined amount of money (typically, U.S. dollars) that the importer will pay, regardless of any fluctuations in currency exchange rates. Setting up a forward contract requires the importer to be creditworthy and both parties to agree on the amount, the date of payment, and the currency exchange delivery date. This solution is the most common way to handle foreign exchange risk.
Overview: Harnessing International Factoring to mitigate Export Risk
Risk mitigation is essential when dealing with global marketing, and international factoring can help. International factoring is a method of reducing an exporter’s risk by working with a factoring company, also called a factor. The international factoring process works by making the factor the middleman in the transaction between an importer and exporter.
It takes a few easy steps to get started with invoice factoring. The exporter first receives a purchase order from an importer. The exporter then sends the invoice directly to the factor, rather than to their customer. The factoring company will go to the importer to receive approval for the purchase order. Immediately following approval, the factor will disburse up to 80% of the total invoice (minus a commission fee) to the exporter. So, the exporter only waits 24 hours or less for payment, as opposed to 30 days or more. Finally, when the importer pays the total invoice, the factor will send the remaining amount owed to the exporter.
There are several advantages to using an international factoring company. To start, the financing company is usually located in the country where the foreign markets are, which makes the process smoother since it can use local collection resources. Additionally, the financing company will check the credit of the importer before you do business. This credit check reduces risk even further because it ensures that your customer is creditworthy.
If your customer fails to pay an invoice, whether or not you would be responsible depends on the contract with your factoring company. There are two main types of factoring contracts: recourse and non-recourse. Recourse factoring is a type of service where the debt of an overdue invoice will have to be paid by your business to the factoring company even if it is not paid by your client. Therefore, in a recourse contract, the factor can go back to you to ask you to pay. Non-recourse factoring on the other hand, is paying extra fees as a type of “insurance” where if your client does not pay for the invoice, your business will not be charged in consequence. Most invoice factoring deals are recourse factoring, meaning that the invoice must be paid by either you or the client. Be sure to read your contract carefully to make sure you understand the details.
Work With Us to Lower Your Export Risk
Factoring your international invoices can ease the burden and reduce the risks you face as you export to the United States. Dealing with foreign governments and markets can be complicated and confusing. The U.S.-based team at Cultiva Financial understands local laws and regulations — and can help protect you from the risks we outlined above. Apply today to start international factoring to get paid faster and more efficiently.