Supply Chain Solutions No.40 – Can Buyers Benefit from Trade Finance Factoring?

Trade finance or factoring is a mechanism that frees capital delivering positive cash flow that brings value to both export Sellers and import Buyers of any commodity.

Through factoring, Buyers can gain a credit facility through a factoring organisation like Stenn International where the Seller pays the finance charges of goods exported internationally.

The Buying company, by controlling the factoring process can leverage their total spend to gain a credit facility outside of normal banking operations and standardise the monthly interest rate.  While if multiple vendors approach the factoring organisation, one credit facility to the Buyer will be the same, however, finance rates may not be standardised affecting bottom line margins.

What is factoring?

  • Factoring is the transfer of an invoice receivable from the Seller to a third-party factoring organisation who takes over the collection of the receivable from the Buyer with a finance fee deducted from the Seller’s receivable.

Why should Buyers of exported goods be interested in factoring?

  • Buyers working with international Sellers requiring payment upon shipment, factoring gives the Buying company extended terms such as 30, 60 or 90 days valuing your operation by receiving goods, and been paid by the end customer before paying for the goods resulting in the company been able to leverage capital to expand sales.
  • Sellers receivables are taken over by the factoring company, say Stenn International, this values the Buying organisation only needing to pay one creditor resulting in reduced bank fees and reduced human resources to manage the Seller payment process.
  • The Buying company gains value through extending their existing credit lines via an organisation that is not constrained by governmental bank regulations, offering greater flexibility on credit lines supporting business growth.
  • Stronger Seller relationships are formed; the buyer’s global vendor base will be paid immediately upon submission of goods shipment documents.

Does factoring increase the cost of goods?

  • Any Seller offering payment terms needs to factor in the cost of financing invoices, which isn’t based solely on bank rates.
  • Sellers may not have the easy access to local bank finance which will be dependent on the Seller’s assets, years in operation and relationship.
  • Bank overdraft facilities are limited, mid-term loans from the government and banks cost 0.5-0.8% per month, trade insurance at a similar rate. If the Seller lends from the short-term market the interest rate maybe 1.5-10% per month.
  • Finance from Stenn International is a highly competitive alternative for short-term financial services available to Asian Sellers, what’s more, it is legitimate.
  • If the Seller is not offering payment terms today, the price may increase, approaching as a phased payment term increase, e.g., 1st 30 days then 2nd 60 days, the price may not be affected, delivering value to the Buying organisation. If the Seller is already offering terms, there may be an opportunity to rediscuss pricing where finance was at a higher interest rate, gaining margin advantage.

Is factoring available to every Buyer-Seller pair?

  • Factoring is based on the credit viability of the buyer. Where a Buyer is granted a credit limit, there is no restriction on which export Sellers can draw against that limit.
  • Factoring is only available to Buyers in developed first world countries due to credit visibility and controls.
  • Factoring can only be utilised for export trade.

Are there any direct factoring costs to the Buyer?

  • No, the only cost is the agreed monthly interest deducted from the Seller’s payment.

How does the factoring process work?

  • Stenn evaluates the Buyer and determines a credit limit and interest rate.
  • Buyer advises the Seller to work with Stenn for factoring
  • Framework agreement is signed between Stenn and the Seller
  • Exhibit to the Framework Agreement is completed for each invoiced financed
  • Seller-Buyer sign a Notice for each Exhibit transferring the receivable to Stenn
  • Seller exports goods and sends copy documents to Stenn
  • Stenn pays Seller less agreed finance rate
  • Stenn collects receivable from Buyer

IDGC in cooperation with Stenn International, a UK-based factoring provider, focused on cross-border invoice financing between emerging markets and developed countries.  IDGC is the bridge between global Sellers and Stenn International, enabling the full benefit of factor finance to both Buyer and Seller.

We support businesses globally offering an easy solution to financing from export to customers in developed markets.  Factoring gives Sellers immediate access to risk-free capital upon export, and the Buyer receives flexible payment terms on an open account freeing necessary capital…a win-win solution for both Seller and Buyer.

Factoring is available to all global businesses exporting commodities to developed markets, reach out to Phil Bailey via email phillip.b@idgc.co  to gain immediate benefit to your business.

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