!!To be able to see this page correctly, you need to have Flash player 7 or higher installed!!
Please click here to start installing the player.
Please click here to start installing the player.
Bigger advances in ‘smaller’ world
April 2008
Sponsored by Fortis Commercial Finance
The world is getting smaller, or so it may seem. Technological advancements and political and legislative agreements in recent years have greatly increased the speed, frequency and geographical reach of communication and distribution around the globe. In the corporate domain this has undoubtedly brought advantages. For many SMEs, opportunities for international business development, unthinkable in past climates, have become an achievable reality.
For companies previously trading solely within an increasingly saturated domestic market, the potential of accessing an entirely new customer base is highly appealing, particularly as it may reduce reliance on the health of the UK economy.
However, investment in such revolutionising ventures can be considerable. While a large corporation may be able to comfortably self-finance the development of a presence overseas, for an SME, additional financial support is likely to be required along with an extended risk management strategy to minimise the associated risks of international trade.
Combine this with the increased complexity of doing business abroad and it is easy to understand why companies might hesitate before making the decision to export.
Despite these hurdles, however, each year sees more and more SME businesses rise to the challenge, successfully creating and sustaining international buyer relationships. So this suggests that it is worth the commitment.
But how do these companies raise the finance needed and reduce their risks to an acceptable level?
In the last few years statistics released by the Asset Based Finance Association (ABFA) have indicated invoice finance has an unrelenting popularity among UK businesses with clients’ sales volumes totalling nearly £200bn in 2007.
The use of international factoring services is also steadily increasing as SMEs realise its benefits in mitigating some of the risks associated with overseas business. ABFA statistics show the export invoice finance industry has seen a rise of more than 50 per cent in client sales volumes in the past five years.
When considering the additional requirements of developing their export markets it is evident why such a form of financing is beneficial to many companies. While international factoring facilities cannot solve every overseas trading issue, the service has undisputed expertise when it comes to reducing the key commercial risks a company faces on entering a new market: late payment and bad debt, while concurrently easing pressures on cash flow.
Inevitably, exporting almost always means longer payment terms than when trading within the UK and this must be taken into account in cashflow forecasts and when planning a credit management strategy. In Italy, for example, terms of trade will be a minimum of 90 days and often far longer.
Collection of debtor payments has been a long-term issue for many companies. Entering new markets can be even more demanding on cashflow as international debtor locations means invoicing and credit collection processes become more complex making it harder to ensure payments are received on time, or received at all.
Different payment terms and regulations, varying legal systems and procedures for recovering debts, coupled with language barriers and individual cultures and business practices within each country can create numerous challenges for those inexperienced at dealing abroad. The additional strain international business can place on cashflow and the in-house credit collection teams should not be underestimated.
An international factoring facility will advance up to 90 per cent of the value of international invoices within 24 hours of the invoice being issued, meaning time-to-money for companies is very much shorter and cashflow burdens are significantly reduced.
And the international factor’s role is not only to advance cash against sales, but also to act on behalf of the client for overseas collections. This is done by approaching debtors in their own country, in their own language and in the locally accepted manner. As a result, distances and cultural differences become less of a barrier.
Also, if a credit protection policy is taken out, the factoring company will also guarantee payment to pre-agreed limits should an invoice remain unpaid at 90 days after the invoice due date, provided it has not been disputed.
For international factoring to be truly effective, however, the international factor must have a genuine international presence, preferably through its own network such as the one we operate within the FCF Group or via one of the international factoring groups such as FCI.
It is also essential that they have experience of providing such facilities as well as having access to overseas legal representation that can be quickly implemented to pursue payment through legal processes, should the need arise.
It is also vital that the terms of funding to be provided against exports are made very clear. For example, are there any restrictions on the advance rate against export sales, or, limitations to the percentage of your overall sales ledger that export sales can represent?
In addition, businesses should consider negotiating a suitable cash management and foreign exchange facility with a bank able to meet the needs of the company on a local, national and international scale – and one that will work alongside the international factoring service. Also, by opening bank accounts in the location of your debtors prompt payment will be much more likely.
International factoring is a proven and highly effective tool for SMEs looking to enhance their cashflow at the same time as mitigating their risk of late or non-payment. And, as the statistics show, there are an increasing number of successful UK businesses taking advantage of it both in their UK and cross border markets.
GLOBAL REACH
Fortis Commercial Finance Limited has a presence in 19 other countries. It specialises in providing multi-currency and pan-European working capital and credit management solutions for internationally active companies. Its products and services include factoring, invoice discounting, reverse factoring, stock finance, outsourced credit management and credit protection.
Part of the Fortis Commercial Finance Group, one of the five largest receivables finance providers in Europe, it is also a member of Factors Chain International with a network of more than 200 companies.
For more details, contact Fortis Commercial Finance on 0800 515 790 or visit the Fortis Commercial Banking website.
