Border Control

When commercial relationships are good there may not be any problems with overseas customers paying, but when invoices get long overdue it’s surprising how quickly the customer can forget how to speak your language, and it’s not practical to get the goods back so you can re-sell them. You don’t want to commit your time and money taking legal action in a different country and court processes might take much longer than in your own.

TIMEZONES AND DISTANCE

It is difficult to conduct day-to-day business with a customer on the other side of the world and you may find you need to make urgent contact but their working day is the middle of the night for you. The physical distance between yourself and your overseas customer means it is difficult to check them out with a visit. Delivery of goods can be costly and complicated when you have to rely on several parties to ensure the goods are delivered on time and in good condition.

If there are issues with product, then raising a credit and taking goods back, as you might do in your own country, is just not practical when the goods are in another country. It is not uncommon for goods to be sourced in a third country – a country different from that of the supplier and the customer. In this situation the supplier must carefully manage the production, packaging and dispatch to meet the customer’s expectations.

BUSINESS CULTURE

Suppliers need to be aware of the business culture in the country of the customer because it may be very different from their own. Expectations of payment terms (what is ‘normal’ in their country) may differ. For example, across Europe standard payment terms range from a couple of weeks in some Scandinavian countries to around 90 days in Southern Europe, with countries like the UK, Netherlands and Germany typically using 30 to 45 day terms. So, a foreign customer may disregard shorter payment terms and apply his usual approach to domestic invoices.

Delays in making payments can, in relation to the stated terms, be worse in Northern Europe than in the South: in Portugal, for example, a debtor may pay on 100 days when the payment terms locally are, say, 90 days, a ten day delay. In the UK, a debtor may pay around 60 days when the local terms are 30 days, a delay of up to a month.

PAYMENTS AND EXCHANGE RISK

How payments are made may be different from what you do yourself, so you might be expected to accept bank transfers, bills of exchange, cheques (that might be post-dated) and bank charges might be deducted. Cheques drawn on banks in the country of the debtor can take a long time to clear.

You may also only be able to get payment in the debtor’s currency, which may be different from your own. Suppliers should protect themselves against currency exchange risk not only for the situation where customers pay in the ‘wrong’ currency but also when foreign currency sales invoices remain unpaid for a long time and the value of the foreign currency has deteriorated (although exchange rate fluctuations can, of course, take place overnight).

THE SOLUTION

A supplier should use export factoring to improve its cashflow, remove the headache of collections and provide protection against buyer default or insolvency. Put simply, the supplier does not wait until its export customers pay several weeks or months down the line, instead they assign their sales invoices to a factoring company who finances them almost immediately at up to 90% of the sales invoice. The 10% balance is paid across when the customer pays, and the factor deducts charges for the service.

The so-called two factor system in international factoring is where a supplier’s factor operates in partnership with another factor in the country of the supplier’s overseas customer (or debtor). This overseas factor communicates with the debtor to collect the invoices and will take legal action where necessary.

This system therefore overcomes the risks described above because the overseas factor is of the same language, time zone, country, business culture and legal environment as the overseas debtor.

The overseas factor can also provide bad debt protection (issues a credit limit on the debtor) so that if an undisputed invoice reaches 90 days past due date, they will pay out 100% of the value of the invoice.

Venture Finance handles international factoring in this way. As a member of the International Factors Group (IFG), Venture works with other members based in the country of the debtors, making use of their local expertise to overcome the potential for unnecessary delays and stalling techniques. Export factoring, therefore, does not just offer finance to improve cashflow.

It also provides services such as collections, sales ledger management and protection against the customer going bust or failing to pay the debt. At Venture our aim is to make your exports more efficient and safer.