An increasing number of SMEs are choosing to sell their products abroad. The potential market is significantly greater than the domestic one – but so too is the degree of competition. In an ideal world, businesses would be able to protect themselves against the credit risks associated with foreign customers by agreeing a system of "cash in advance" or "prepayment" with their customers. In reality, however, only a few businesses have the market power to impose these types of payment terms. Given high levels of competition, it is often necessary to offer more customer-friendly payment terms such as "payment against invoice 60 days net" in order to generate sales. Payment terms such as these correspond to loans by the supplier to its customers. Besides the consequences of delays in incoming payments (which need to be financed), the supplier also bears the risk of the customer being unable or unwilling to pay.
These negative consequences tend to be more serious in the export business: A lack of knowledge about business partners abroad is often the cause of payment delays or default. Other potential concerns are the longer payment periods and, more generally, differing mentalities and ways of doing business.
In these circumstances, factoring (i.e. the ongoing sale of trade receivables to a bank, as factor) can be used to facilitate payments and make growth objectives a reality. The process could hardly be simpler: At the outset, the exporter specifies a requested limit for each foreign client to his bank (i.e. the factor). The bank then reviews the creditworthiness of the foreign buyers, if necessary with the help of an internationally active credit insurance partner. If there are potential business partners who are declined by the bank because their credit rating is not good enough, the exporter may not want to proceed with delivery because of the risk of default. However, once the bank has set the inventory credit limits, the exporter can deliver without anxiety because these receivables are fully covered against default.
Besides the insurance aspect, factoring also reduces the impact of longer payment periods on the liquidity of a business: The factor immediately grants in advance up to 90 percent of the accounts receivable following delivery of the goods or provision of the service. This means that the entrepreneur always has good liquidity, which enables him, within certain limits, to grant his customers payment periods that are customary for the relevant sector and country. The immediate inflow of liquidity also provides significant advantages for factoring clients on the procurement side. Operating as a cash customer means that a company can demand cash and other discounts from suppliers. This produces corresponding, positive cost effects.
Factoring solutions can be tailored to meet client needs and can, for instance, involve outsourcing a company's entire receivables management operation to the bank. In addition to the above-mentioned full-service factoring option, there is also in-house factoring in which receivables management remains with the factoring client. With in-house factoring, the factoring client can choose whether to opt for an open procedure (in other words, the debtor is notified) or a silent procedure (no notification is issued).
In many cases factoring has been instrumental in helping companies expand into new markets. The market entry and expansion phases in foreign countries are often fraught with risk. In this context, factoring represents an innovative form of business finance which provides essential support through a comprehensive bundle of services.
You can find further information and a no-obligation personalized cost/benefit analysis at www.credit-suisse.com/factoring.
Author: Richard Hügle, Head of Sales Factoring Finance at Credit Suisse
Tel. +41 44 334 26 53