What is cross-border receivables financing? Two common scenarios

What is cross-border receivables financing? Two common scenarios

Securing orders from overseas corporates is challenging and exciting, but it comes with a few caveats.

Negotiating payment terms on foreign soil often lead to a reluctant “Yes” to win the orders, quickly followed by the gaping hole in cash flow.

Business owners will throw large resources into fulfilling orders, channelling capital into production, raw material and supplier costs to get goods delivered. They make good on one or two orders with payment terms often stretching out to 120 days from delivery.

The crunch creeps in once order volumes increase, outpacing incoming payments, overlapping procurement costs.

Where do local receivables finance providers fall short?

A lot of businesses and advisors are now familiar with domestic receivables financing, often called invoice finance, invoice factoring or debtor finance.

It’s a simple process whereby you present outstanding invoices to receive advance payments today. A highly effective tool for accelerating cash flow.

Domestic lenders are more than capable of providing receivables financing when you sell only to Australian customers. They are comfortable with local risk and maintaining legal jurisdiction in order to confirm that debts are “collectable” within their home market.

Once you begin extending credit terms to foreign customers, domestic providers will avoid extending financing against these receivables often due to the following:

  • Legal jurisdiction
  • Senior debt provider will not allow it
  • Inability to assess credit risk and/or counter-party complexities
  • The bank’s covenants or debt restrictions don’t cover overseas customers
  • Expensive to chase debts, the risk of non-payments and collection issues
  • The lender’s trade credit insurance policy doesn’t cover foreign debtors

What is cross-border (or export) Receivables financing?

At the basic level cross-border means trade “between different countries”.

Cross-border receivables financing is essentially the same mechanical process as domestic financing. You present creditworthy invoices and receive 80% upfront with the remaining balance paid to you minus fees once paid.

When you deal with a large overseas corporates, demands for credit terms of up to 120 days from delivery with no deposits is a reality you simply just deal with.

The financier must carry internal expertise on their trade credit team that understands foreign credit risk, including points uncovered above relating to collections and assessments. In addition to expertise, the funding lines they are provided with to on-lend to businesses must also allow for it.

Let’s take look at two common scenarios:

I ship goods from Australia to other countries

This is called a direct export open credit contract. Goods are dispatched, received and invoiced. Sometimes deposits are taken, with balances paid up to 120 days later.

I take orders from overseas buyers and ship from a foreign location

Increasingly, Australian companies are manufacturing or buying from overseas and shipping directly to their overseas customers. This avoids increases costs, shipping times and reduces the need for any type of local warehousing. A lot of operators running this type of process have higher margin businesses.

Missing out on orders due to lack of capital caused by timing gaps in payments can frustrate any expansion plans. Scrambling for loans can result in expensive mismatched debt or selling down expensive equity taking years to recoup profits.

It’s important to speak with a finance broker or accountant that has a strong relationship with specialist providers. Even if you don’t have an immediate need, building relationships with trusted advisors can not only save you time but also save your customer relationship through timely deliveries on orders.

Does your broker or accountant know about Stak? If you’re a broker, speak with a partner manager today.

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We regularly share our thoughts on trade finance, lending, company culture, product strategy and design.

Stak works with clients that sell to some of the largest buyers in Australia & overseas.

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