Scott Kaufman
Scott Kaufman, Owner, Liquid Capital

Factoring has long been an option reserved strictly for domestic businesses. International accounts receivable, considered by many would-be financers to be ineligible collateral, could not be used to provide the kind of fast, flexible funding that makes factoring such an attractive option for new and growing businesses. But times are changing. Thanks to a shift in how factoring is perceived, along with the growth of companies and industries overseas, previously closed off sources of funding are now available to businesses. Factoring’s overseas acceptance speaks to its growing impact on different industries and businesses of all sizes.

The level of financing factoring can provide could prove business-saving, simply by meeting many needs encountered by new and growing businesses that other forms of lending simply cannot address. This fact has long been understood in specialty lending circles as well. Although factoring has become a respected and mainstream option for quickly enhancing cash flow to grow businesses and meet pressing expenses, one area of factoring has remained uncharted territory for most lenders: international factoring.

As the name implies, international factoring is a subset of financing that grants business owners the capability to offer open credit terms to foreign buyers. These buyers may be either companies to which a business would not normally be able to sell, or buyers that business owners may not feel comfortable selling to without a more conventionally accepted deposit. To that end, international factoring is based on the same principles as the conventional home-grown variety of factoring, earning capital quickly at little expense or risk to a business.

Why then has this seemingly obvious, potentially bountiful source of funding been denied to North American businesses? There are a number of reasons. Often, banks or lenders in North America eschew accepting foreign receivables because they are leery of a perceived increased risk associated with international accounts. Other would-be lenders determine foreign accounts receivable to be ineligible because of byzantine laws, regulations and general bureaucracy that would make the process both a slow and unprofitable one. Still, others have ignored international factoring merely due to the belief that clients would have no interest in dealing with the process, creating a self-fulfilling prophecy.

To be sure, until recently many facets of international factoring did legitimately impede its proliferation, at least in certain respects. Yet today, qualified lenders have successfully managed to tackle those roadblocks, opening both a literal and figurative world of funding options to businesses. To understand the facets of factoring with overseas receivables that were once impediments provides valuable insight into the evolving relationship between domestic and international businesses and the role alternative financing plays between them.

Weighing the Risk

Any time the specter of international business is raised, the multitude of associated risks will invariably rouse fear as well. Lax overseas regulation, unscrupulous middlemen and anxieties over unfavorable exchange rates are just a few of the common worries that have scared lenders and businesses alike, making international factoring seem like a process that’s more trouble than it’s worth.

However, with international factoring, businesses can afford to relax with the knowledge that the lenders will assume the responsibility for the transaction and — as a consequence — for the risks as well. This goes a long way toward putting to bed much of the unease that tends to come about when broaching the subject of conducting business overseas.

While serving as an intermediary to facilitate international factoring with clients of my own, I have found that, contrary to what conventional wisdom might suggest, an accounts receivables’ country of origin usually does not have much of an impact on any anxiety clients might express over the process. In other words, dealing with receivables from a first-world nation stands to evoke just as much worry as dealing with those from a less developed country. Thankfully, by assuming any risks and articulating that they will shoulder the burden of the transaction, lenders today assuage many of the fears that were once seemingly an immutable part of the international factoring process. Where the word “international” was once all it took for most lenders to scatter, today international boundaries are far less intimidating.

Timeliness & Expense

Contrary to the perception that factoring overseas receivables is a lawless endeavor, others fear that too many regulatory bodies or middlemen — both on the domestic side and overseas — will slow the process of exchanging receivables for working capital, raising exorbitant fees to nickel and dime businesses to boot. As the value of factoring rests in its ability to gain expedient cash flow at little overall expense, this was once a particularly contentious issue for lenders and businesses alike.

Yet this issue, too, has been put to rest with the modern international factoring processes in place today. A point I stress to clients is that responsible factoring companies will fund the invoice price upfront and take on any risks, allowing business owners to increase their foreign sales while enhancing their balance sheet. Moreover, the process has now been refined to a science, delivering the needed funding faster than ever before.
Businesses move too fast today to wait for needed capital held up by red-tape induced delays, regardless of where or with whom business is done. Responding to this reality, lenders have made amends with the inefficient processes of the past with renewed vigor, helping businesses tremendously.

International Factoring Today

Addressing the concerns that U.S. business owners have historically associated with international factoring, today’s factors have made great strides in assuaging fears about the process. By being transparent about the process and offering full disclosure of terms, factoring companies have brought international factoring into the light.

I have found it particularly helpful to provide clients with international factoring case studies tailored to their specific needs. By illustrating how similar clients have made international factoring work for them — in accordance with their time constraints, amount of capital needed, industry in which their business operates and so on — clients can see the demonstrated success of international factoring for themselves.

In the end, allaying clients’ anxieties about international factoring comes down to following the same best practices already in place for walking businesses through any other form of alternative financing. Demonstrating your experience in the industry and ensuring a highly personalized approach to each client’s needs goes a long way in making the process smooth for all parties.

Alternative financing is, by its very nature, unlike conventional financing and so it necessarily demands a careful explanation when extolling its virtues to clients. To that end, a factoring company must be every bit as much a teacher as it is an expert in business and financing. A good teacher instructs each student on an individual level, taking into consideration their strengths, struggles and goals. A business that facilitates international factoring would be wise to follow this approach by speaking with each client on an individual level, recognizing the inherent worries that might come about throughout the process and working to put the client’s mind at ease. Following this principle helps clients take advantage of international factoring and do so with great success.

Regardless of why many lenders historically decided to turn down accepting foreign accounts receivable, the fact is at one time they did make this choice. But the winds of change are blowing, bringing a new outlook on international factoring along with the respect it deserves as a viable source of alternative financing. For business owners, this can only be a good thing. International factoring allows a business to drastically increase its prospective supplier network to all corners of the globe, increasing the number of opportunities available and making it infinitely more attractive around a rapidly shrinking planet.