Export Factoring: 

Simplifying Cash Flow for Indian Exporters

Vinu: Hey Manu, I’ve been hearing a lot about export factoring lately, but I’m not entirely sure what it is. Can you explain it to me?

Manu: Sure, Vinu! Export factoring is a financial service where an exporter sells their export invoices to a factoring company, known as the "factor," to get immediate cash. This helps exporters manage their cash flow without waiting for overseas buyers to pay, which can take a while.

Vinu: Interesting. How does it work in practice, especially in an Indian scenario?

Manu: Let me give you an example. Imagine a company called XYZ Textiles Ltd. in Mumbai. They export garments to a buyer in the USA named ABC Retailers Inc. After shipping the goods, XYZ Textiles sends an invoice of USD 100,000 to ABC Retailers with payment terms of 60 days.

Vinu: So, they have to wait 60 days to get paid. But where does factoring come in?

Manu: Exactly. Instead of waiting, XYZ Textiles approaches an Indian factoring company, like SBI Global Factors Ltd., and enters into an export factoring agreement. The factor agrees to advance, say, 80% of the invoice value immediately.

Vinu: So, XYZ Textiles gets cash right away? How much would that be in this case?

Manu: Yes, they would receive USD 80,000 upfront, which is 80% of the invoice value. This helps them manage their working capital without waiting for 60 days.

Vinu: That sounds helpful. But what happens when the 60 days are up and the buyer pays the invoice?

Manu: When the payment is due, the factor, in this case, SBI Global Factors, collects the full USD 100,000 from ABC Retailers Inc. Once they receive the payment, they deduct their fees and any interest, and then pass the remaining balance back to XYZ Textiles.

Vinu: How much would XYZ Textiles end up getting after all the deductions?

Manu: Let’s break it down. SBI Global Factors might charge a factoring fee of 2% and an interest rate of 12% per annum. For this invoice, they’d deduct USD 2,000 as the factoring fee and about USD 1,200 as interest for 60 days on the advance amount of USD 80,000. So, after these deductions, XYZ Textiles would get the remaining USD 16,800.

Vinu: So, by using factoring, they’re trading off some money for immediate cash flow. But is it safe for them?

Manu: Yes, especially if they choose a non-recourse factoring agreement. That means if ABC Retailers fails to pay, XYZ Textiles doesn’t have to return the advance. The factor takes on the risk of non-payment.

Vinu: I see. What’s the big advantage of export factoring for a company like XYZ Textiles?

Manu: There are several. First, they get immediate cash to cover their expenses, improving cash flow. Second, they don’t have to worry about chasing payments from overseas buyers. The factor handles that. Third, they’re protected from non-payment risks if they opt for non-recourse factoring. And finally, it allows them to offer flexible credit terms to their buyers, making them more competitive in the market.

Vinu: That makes a lot of sense, Manu. Export factoring seems like a powerful tool for exporters, especially in managing their cash flow and reducing risks.

Manu: Absolutely, Vinu! It’s a great way for exporters to keep their business running smoothly while focusing on growth and expansion.

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