Converting export receivables into cash

There are several ways to turn export receivables (the monies owned to you by the importer) into cash. They are as follows:

• Confirming
• Factoring
• Forfaiting

Confirming

Confirming is a financial service in which an independent company confirms an export order in the seller’s country and makes payment for the goods in the currency of that country. Among the items eligible for confirmation (and thereby eligible for credit terms) are the goods themselves; inland, air, and ocean transportation costs; forwarding fees; custom brokerage fees; and duties. For the exporter, confirming means that the entire export transaction from plant to end user can be fully coordinated and paid for over time.

Factoring

Factoring (also known as debit financing) involves the discounting of your foreign account receivable to a specialist factoring house – an organisation that specialises in this form of financing. A factoring house will probably be prepared to offer you more (up to 80%) for the value of your accounts receivables than a bank, but will only provide financing for work already done and for which you have invoiced the importer. Once the final payment is received from the importer, you will receive the remainder of your outstanding monies, less the factoring house’s financing charges (which will probably be a few percent higher than the standard rate for an overdraft). Essentially you would transfer your title to your foreign accounts receivable to the factoring house for cash at a discount on the face value. Although factoring is sometimes done without recourse to the exporter, the specific arrangements may vary and need be verified by the exporter. Factoring is usually not available where a draft is involved.

Forfaiting

Forfaiting is a form of bill discounting, yet it is usually provided without recourse to exporter in the event of non-payment at the maturity of the bill (but this may differ from forfeiting agency to forfeiting agency and so it is important that you confirm this with the agency concerned). Forfaiting enables exporters to convert a credit sale into a cash sale. The reason for this is that forfeiting involves selling your longer-term accounts receivable or promissory notes from a foreign buyer to a specialist agency such as a bank that does forfeiting (not all banks are involved in forfeiting). The forfeiting agency would pay you for the value of the accounts receivable, less a discount, which represents their fee. The difference between factoring and forfeiting is that while factoring is essentially a loan based on your accounts receivables, forfeiting is the outright sale of your accounts receivable. Forfaiting is often used in instances where you will be paid in stages and is used for financing high-value goods, such as construction projects. How it works is that you would draw up a series of bills of exchange with different terms for each stage of the contract and then you would approach your bank or specialist financing organisation to negotiate these bills with them.