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What is Export Customer Financing (ECF)? ECF is a receivables management and financing service designed to improve an exporter's cash flow and in some cases, cover risk. This is best suited for financing trade, and unlike other financing services, it generally requires no collateral.
What is with recourse and without recourse ECF?
With recourse ECF (in the event the customer fails to pay on maturity),requires the exporter to pay back the advance obtained. In non-recourse ECF, Finance Company provides financing and assumes the entire credit risk,this will bear the bad debt risk in the case of the inability of the customer to pay. Finance Company pays exporters on behalf of their customers without recourse.
How does ECF benefit an exporter?
Finance Company turns the exporter's invoice into cash, which means that the exporter can have instant access to its earnings. Exporters do not have to wait for the usual extended period for remittance from their customers. Therefore, an export enjoys a healthier cash flow while offering longer payment terms to its customers.
How much does Finance Company pay upon shipment?
Finance Company pays up to 90% of the invoice value as soon as a shipment is made.
Apart from getting money quickly, what are the other benefits to an exporter?
As the bulk of the payment is made immediately upon shipment, the foreign exchange risk is virtually eliminated. Further, the exporter gets full protection against bad debt, so there is no credit risk. The exporter can also offer payment terms to its customers on an open account basis, which assists in generating more business. The amount of money an exporter can obtain from Finance Company automatically adjusts to the level of turnover; therefore, Finance Company is able to provide a growing business with growing financial resources. Finally, collection and credit control functions are carried out by Finance Company, which saves time and money to the exporter and the exporter, need not spend time and resources in collection efforts. Would an exporter lose direct control over its sales if it uses ECF?
Certainly not! Finance Company not only keeps the exporter regularly informed on the position of every individual customer's account, but also consults the exporter as to collection procedures if required Would ECF cause friction between exporters and customers? Finance Company understands and appreciates an exporter's concern over this matter. However, in practice and in the context of modern day business, customers are unlikely to react adversely to the use of ECF. In fact, it permits customers to obtain extended payment terms, which is often invaluable to them.
Finance Company recognizes the importance of the customer to the exporter, and to help foster a closer exporter/customer relationship, every courtesy and consideration is given by Finance Company to the exporter's customers. Further, ECF helps the exporter avoid any possible potential embarrassment of having to directly seek payment from its customers.
Does ECF make the customer think that the exporter is financially strapped?
On the contrary, international customers now accept ECF as a normal, progressive business service. For growth-oriented companies, ECF is the preferred choice. In fact, ECF, like factoring, is perceived as a sign of a company's rapid growth. An indication of a growing organization is one which keeps a keen focus on its core activities of production and marketing, while outsourcing non-core activities such as collections and credit control to experienced professionals. Factoring is without a doubt a significant global trend. During 2009, the total volume of business handled by factoring companies around the world was over 1.3 Billion Euros. ECF, like factoring is rapidly becoming the obvious business tool for growing companies operating in export markets.
How is the exporter kept informed of the payments made by its customer? Finance Company pays the balance of the invoice amount to the exporter within seven days from receipt of payment by the customer. The exporter is immediately informed of its customers' payment status, as well as deductions, if any. Does the exporter have to pledge assets to Finance Company to obtain ECF? No! This is the greatest advantage of ECF offered by Finance Company. This means that the exporter can get immediate payment towards its export receivables from Finance Company and keep all its assets free for funding from local banks. When is the balance amount paid to the exporter? Finance Company pays the exporter the balance amount within seven days of receiving payment from the customer. How is the GR form dealt with in the event of non-payment by the customer? Exporters should check with their advisors regarding this, but generally, the fees charged by Finance Company can be accounted for as an early payment discount usually granted to customers. Will the exporter be able to avail itself to a pre-shipment credit facility from Finance Company?
Finance Company will offer pre-shipment credit only to companies in certain countries. The government regulations of some countries prohibit foreign companies such as Finance Company to offer any form of loans or credit to companies based in such countries Is ECF suitable for every company? No, as much as Finance Company would like to provide ECF to every exporter, those meeting the following criteria are generally unsuitable:
- Where the credit offered to the customer is more than 360 days or where the customer desires to pay by Letter of Credit
- Where there are consignment sales or return arrangements
- Where the sales value is too small and goods/services are being sold to a large number of customers
- Where sales are made to customers or in certain countries which are not creditworthy
ECF sounds attractive, but what are the costs?
Finance Company charges a service fee which is a percentage of the invoice value, and includes all costs related to credit insurance, collation administration, as well as interest. There may be a one-time set up fee to cover legal, insurance and registration costs.
What is the service fee based on?
The service fee is levied based on the work involved in collection, administration as well as for credit protection of the gross value of the invoice and is based on the following criteria: - Gross sales volume
- Payment terms offered to the customer
- Number of invoices and credit notes
- Degree of credit risk represented by the customer or the transaction
ECF seems like a rather expensive way of getting capital, doesn't it?
No. The correct way to evaluate ECF is in terms of the exporter’s growth objectives and the opportunity an exporter loses by foregoing business on account of unavailability of funds. By enabling the exporter to gain access to additional working capital without restricting other forms of borrowing, ECF provides a unique form of financing. When the exporter counts the additional savings it will enjoy in terms of staff salaries, office overhead, bad debt and all the incidentals that are incurred in maintaining its sales ledger and enforcing payment obligations, the exporter sees how valuable ECF really is. Is ECF better than credit insurance? Whether the exporter should use credit insurance or ECF will depend on the exporter's individual needs. Below is a comparison of the features of credit insurance and Finance Company ECF:
What types of industries are suitable for ECF?
Manufacturing and trading companies are the two main types of industries that benefit more from ECF. However, Finance Company can tailer the facility to cover export of the following services:
- Advertising firms
- Legal firms
- Architectural firms
- Medical firms
- Construction & engineering companies
- Software, BPO, IT, ITES
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