Businesses engaged in international trade may have cash flow and other financial issues as a result of lengthy settlement waits for invoices from importers to exporters. Export factoring is helpful in this situation.
This blog will discuss various aspects related to this factoring, including the benefits of export factoring services in Malaysia and guide businesses on how to choose the right factoring partner.
What Export Factoring means?
In the financial arrangement known as export factoring, a business sells its unpaid invoices, or accounts receivable, to a third-party financial institution called a “factor.”
It is very different from traditional funding. In traditional finance, businesses have to borrow money from banks and repay it over time, plus interest. In contrast, export factoring allows businesses to sell their accounts receivable to a factor, converting unpaid invoices into instant cash.
Types of Factoring:
Below are some types of factoring that businesses should know about:
- Recourse Factoring: In this factoring, the exporter remains partially liable for the buyer’s non-payment.
- Non-Recourse Factoring: In non-recourse factoring, the exporter transfers the credit risk entirely to the factor.
- Two-Factor Factoring: This involves two factoring companies: one in the exporter’s country and one in the importer’s country.
- Invoice Discounting: This is a simpler form of factoring where the exporter sells its invoices to a financial institution at a discount.
What Is the Process of This Factoring?
The following steps outline how export factoring works:
Step 1: Exporters sell their goods to importers. In return, the importer delivers receivables and invoices.
Step 2: The third party, known as the export factor, purchases the invoices and receivables that the exporter gets from the importer.
Step 3: The exporter receives a specific percentage of the entire amount of money received from the export factor.
Step 4: At the end of the maturity period, the export factor receives the remaining amount from the importer.
Benefits of Export Factoring
Over time, exporters are becoming more comfortable because of the benefits it offers. Below are the benefits of factoring:
- Make Money Fast
When an exporter sells receivables to the factor, they are immediately paid a portion of the whole amount. This money fulfils the company’s immediate liquidity needs and allows it to operate effectively. - Lowers risk and credit burden
Export factoring reduces the need for credit loans and speeds up consumer payment.
Factoring organisations often assume the credit risk associated with international transactions. They reduce the exporter’s risk of non-payment or default by assessing the creditworthiness of foreign customers. The exporter is relieved of the responsibility of controlling credit risks and potential losses by decreasing the probability of bad debts.
- No Problems with Collecting
The exporter saves time and money by letting the factoring business handle collections. This gets around the difficulties of managing foreign collections, linguistic obstacles, and disparate legal frameworks. - Enhanced Management of Working Capital
Businesses are better able to manage their working capital when cash flow is steady. They may negotiate better terms with suppliers, take advantage of early payment reductions, and have enough cash on hand for daily operations. - Access to Expertise
Other services that factoring businesses typically provide include market data, risk assessment, and credit research. With this understanding of international markets, exporters may be able to access new customers, make informed judgements, or modify their plans in response to shifting market conditions.
Due to these reasons, this factoring is preferred by various businesses.
Choosing the Right Export Factoring Partner in Malaysia
Below are the ways through which businesses can find the right export factoring partner:
Research and Compare
- Emphasise the importance of researching and comparing different factoring companies in Malaysia.
- Suggest factors to consider, such as fees, experience, reputation, and customer service.
Consider Business Needs:
Evaluate specific business needs and choose a factoring company that aligns with your requirements (e.g., industry expertise, specific service offerings).
Follow these ways to find an ideal factoring partner. After finding one, businesses have to:
Negotiate Terms:
- Discuss the importance of carefully negotiating factoring fees and other terms.
- Seek professional advice from financial advisors or legal experts.
Build a Long-Term Relationship:
Emphasise the importance of building a long-term and mutually beneficial relationship with your chosen factoring partner.
Also Read: What Every Business Should Know About Cross-Border Supply Chain Risks?
Due to this above-mentioned information, businesses can use it to decide how best to apply export factoring methods.
For export factoring, M1 NXT can be a reliable company. Its cutting-edge digital platform can simplify the financing of international trade. IFSCA-approved, it gives companies alternative payment choices to maximise cash flow and reduce risks. M1 NXT promotes a more effective and lucrative international marketplace by allowing providers and buyers to have tailored payment schedules.
Owing to these reasons, it has proven itself to be one of the best global factoring solutions.
Conclusion
Export factoring can be a valuable financial tool for Malaysian exporters facing challenges with cash flow, credit risk, and other financial issues. This blog has explored the intricacies of export factoring, including its procedures, various types, and the essential considerations for selecting the right factoring partner and what to do after finding one. Businesses can now leverage this knowledge to make informed decisions regarding the implementation of export factoring strategies.
M1 NXT is a prominent digital platform that supports businesses engaged in international commerce, especially SMEs. M1 NXT provides cutting-edge trade finance solutions, such as export factoring, that enhance working capital accessibility, reduce risks, and speed up cash flow.