Oxford Funding is a debtor finance company that offers financial support to export business. Oxford Funding outline the necessities for a healthy export business.
According to Oxford Funding, maintaining a healthy cash flow is a critical element for success. Cash flow weighs heavily in the equation that determines whether one's business can run its purchasing and manufacturing processes at their peak levels, and having a steady cash flow can greatly control one's ability to grow.
Unfortunately for exporters, recent changes in world trade conditions have made managing cash flows more difficult. Increased competition between suppliers has meant that overseas buyers are now regularly able to demand, and obtain, open account terms. These terms mean that shipments are paid only when they arrive at the buyer’s location – with no reliable guarantee of end payment. For exporters, this is a poor situation for a number of reasons.
Firstly, shipped freight can be at sea for weeks and even months, presenting long delays before payments are made and consequent trouble for cash flow.
Secondly, the Australian dollar could move during shipment and before payment, affecting profit margins and the competitiveness of goods.
Thirdly, once the shipment arrives there is no iron-clad assurance of payment being made. For whatever reason, the buyer may reject the product or suddenly find they are unable to pay. Arranging the return of the goods can be an expensive and time-consuming task.
To circumvent payment delays, one might consider obtaining finance from a bank. Because of the risks introduced by open account terms, however, a number of banks are refusing to fund these types of sales without some form of property or asset security – such as a home or business – on the loan.
Instead, an increasingly popular way for exporters to obtain finance without having to risk their assets is export debtor finance. Often referred to as export factoring, this is a solution that resolves the problems of impeded cash flow and non-payment in one.
Export debtor finance works by having an overseas customer approved for credit by a correspondent at their destination who is attached to the chosen financier.
When the business ships its goods, one has to simply provide copies of the purchase order, invoice and bill of lading to the financier, who gives 80% of the invoice value within 24 hours.
Once the goods arrive at their destination, the financier’s correspondent handles the end transaction, obtaining payment from the buyer locally before forwarding the funds on. When the deal is complete, the financier provides the remaining 20% of the invoice, less their fee.
If all goes well, the process is concluded. One can collect the majority of the invoice value at shipment, and the remainder, less the financier’s fee, at the due date.
One of the aspects of export debtor finance, however, is that it also gives security against non-payment. If a customer has become insolvent, for example, the financier’s correspondent – having pre-approved credit for the buyer – pays what is owed in any case, much as they would had they provided credit insurance.
Thanks to these advantages, many exporters now prefer this type of finance to the more traditional letter of credit method which with its fees on credit lines, its paper base and complex interactions between multiple financial parties is seen as inefficient and costly.
Another benefit is that debtor finance can be used selectively. There’s no need to deploy it across an entire ledger. If one is shipping to a trusted buyer over a short time-frame, for example, and believes the business has adequate cash reserves at hand, one might decide that there’s no requirement to engage the financier at all.