What are the common risks and challenges of invoice factoring for export businesses?

1 Currency fluctuations

Export businesses that deal with multiple currencies face the risk of currency fluctuations that can affect their profitability and cash flow. If the exchange rate changes unfavorably between the time they issue an invoice and the time they receive payment from the factor, they may lose money or incur additional fees. To mitigate this risk, export businesses should negotiate the currency and the exchange rate with the factor upfront, or use hedging strategies to lock in a favorable rate.

2 Customer creditworthiness

Another risk of invoice factoring is that the factor may reject some invoices based on the creditworthiness of the customers. Factors typically perform due diligence on the customers to assess their payment history, financial stability, and reputation. If the customers have poor credit ratings, high default rates, or legal issues, the factor may refuse to buy their invoices or charge a higher fee. This can limit the amount of cash that export businesses can access and affect their cash flow planning. To avoid this risk, export businesses should conduct their own credit checks on their customers and choose reliable and reputable ones.

3 Factor fees and terms

Invoice factoring involves various fees and terms that export businesses should understand and compare before entering into a factoring agreement. The most common fees include a factoring fee, which is the percentage of the invoice value that the factor deducts as its service charge. The advance rate is the percentage of the invoice value that the factor pays upfront to the export business. Additionally, there is a reserve amount, which is the percentage of the invoice value that the factor holds back until the customer pays. Lastly, there is recourse vs non-recourse, which refers to who bears the risk of non-payment by the customer. Export businesses should shop around for competitive rates and negotiate for lower fees if possible.

4 Legal and regulatory compliance

Finally, export businesses must adhere to various legal and regulatory requirements in their own country and in the countries of their customers and factors when engaging in invoice factoring. This may include taxes on the invoice amount, the advance amount, or the reserve amount, as well as trade laws, such as tariffs, quotas, licenses, permits, sanctions, embargoes, and anti-money laundering rules. Additionally, it is essential to ensure that contracts with customers and factors are legally valid and enforceable, without violating any terms or conditions of existing agreements with other parties like lenders, suppliers or distributors.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?