Export factoring can keep your supply chain running smoothly


Export Factoring - Supply Chain - Container ship on the water with mountains in background

Needless to say, we have all learned many lessons about supply chains over the past few years. And while it is a positive sign that these value chains have been normalizing since the pandemic’s worst days, other disruptions have recently emerged.

Attacks on cargo ships in the Red Sea in recent months have caused vessels to reroute around the Cape of Good Hope in Africa, producing longer and costlier trips. Happening simultaneously, the lower water levels along the Panama Canal have limited the number of cargo ships that can pass through the waterway each day.

Supply chains were also rattled not so long ago with the collapse of the Francis Scott Key Bridge in Maryland, which meant other U.S. ports had to step up and take on the shipping activity that the Port of Baltimore normally manages. There has also been a reported shortage of truck drivers stateside.

With all of these external factors in play – from public health crises to weather patterns to political discord – how can we protect our supply chains and – dare we say – even improve the relationships among selling and buying partners?

Export factoring.

Export factoring is a strategic tool to ensure cash flow

Trade finance is a set of financial tools that both improves a business’ cash flow and reduces its credit risk. Two well-known types of trade finance products are export factoring and supply chain finance.

Export factoring is when a financial firm buys a company’s receivables and advances them the majority of the invoice amount up front in cash (up to 90% in some cases).

This type of funding can also include credit protection and collections services. When this is the case, this full package is known as non-recourse export factoring.

Though manufacturers tend to choose export factoring services and retailers initiate supply chain finance with their suppliers, both umbrellas of trade finance achieve the same goal: better access to working capital all along the supply chain. A reliable source of working capital is critical to keeping operations moving along, despite any headwinds in global trade.

The waiting game

In today’s global trade landscape, there is often a wide gap between when an invoice is issued by the seller and when payment is submitted by the buyer. This is normal, though it can be a strain on supplier cash flow.

Payment terms between buyer and seller can be up to 3 months in some cases, meaning buyers don’t have to settle their invoices until 90 days after they have placed their order.

In fact, according to The Hackett Group, it takes large U.S. buyers an average of 54.7 days to pay their bills.

Factoring cuts this waiting period and converts unpaid invoices into cash up front. This method can be looked at as a “win-win” for both the supplier and the buyer, since the supplier receives additional liquidity right away while the buyer can enjoy extended periods until payment is due.

Why does getting cash right away matter to a supplier?

Well, in short, suppliers have vendors to pay too, and they can’t do so on schedule without sufficient capital on hand. By releasing the capital locked in their receivables, suppliers can pay their vendors in a timely manner, respecting these vital relationships needed to procure raw materials so they can continue to fill orders smoothly.

Besides paying their bills, manufacturers can also be looking to grow or expand their operations and customer base, which requires enough working capital to achieve these business goals. Many of these new buyers in new markets are also looking to negotiate longer credit terms, an arrangement that is attainable with trade finance bridging the cash flow gap.

Why do longer payment terms matter for buyers?

Trade finance allows buyers to optimize their working capital too. Without the pressure to pay suppliers right away, large retailers can invest in their operations, product offerings, footprint, employees, and their own growth and expansion aspirations. Having ample time to settle their bills gives retailers the opportunity to focus on their core activities and values.

Credit protection and collections services

Now, in the case a buyer happens to go bankrupt, trade finance still ensures that the buyer’s supplier gets paid. This is because trade finance, or non-recourse export factoring, includes credit protection to protect against non-payment in such cases of default.

This inclusion of credit protection allows suppliers to conduct business with peace of mind, without the worry of not getting paid.

These suppliers also benefit from the collections services that come as part of trade finance packages, which means the trade finance company is responsible for collecting payment from the buyer, giving suppliers more time to invest in their business.

The upshot

Cash is a major catalyst in allowing supply chains to function properly and operate smoothly. In a global trade environment that can be affected by everything from political discord to drought, reliable cash flow through trade finance is something a business can count on.

Trade finance provides easy access to cash by turning unpaid invoices into capital within 48 hours of verifying a business’s invoices, in some cases. Importantly, it supports payment cycles that work for all parts of the supply chain while reducing trade risk, allowing for strong, “happy” relationships and global trade dynamics.

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Author: Catherine Alvino

Catherine Alvino is a Marketing Manager at Tradewind Finance, an international trade finance firm specializing in non-recourse export factoring and supply chain finance solutions. She received her Master’s in Business Administration from Iona University in New York state and has spent most of her career working in and around New York City.

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