Financing export working capital: factoring, receivables assignment and letters of credit compared on real cost
Headline rates say almost nothing about the final cost. A full breakdown of the four ways to finance export receivables, with the all-in calculation and the currency dimension comparisons leave out.
An exporter granting 75 days of credit ties up, on EUR 12 million of revenue, roughly EUR 2.5 million of cash permanently. Four solutions exist to release it. Their headline rates run from 1 % to 4 %, and that range means nothing: the real cost depends on ancillary commissions which, in some cases, weigh more than the rate itself.
A factoring rate of 1.2 % is not comparable with an assignment rate of 3.5 %. The first is a financing rate to which a factoring commission, a guarantee fund and file fees are added; the second contains most of the cost. Comparing them as they stand leads systematically to the wrong decision.
1. The four solutions
| Solution | What is financed | Typical advance rate | Is customer risk transferred? |
|---|---|---|---|
| Factoring | Invoices assigned, on a rolling basis | 85 – 90% | Yes, if the factoring is non-recourse |
| Receivables assignment (Dailly) | Trade receivables assigned as security | 70 – 100% by agreement | No, unless notified and accepted |
| Confirmed letter of credit | One specific transaction, against documents | 100% on compliant presentation | Yes, by the confirming bank |
| Credit insurance + bank financing | The receivables book, indirectly | Per the facility granted | Yes, up to the indemnity limit |
2. The real cost of factoring
It is the most used solution and the most poorly quantified. Four lines add up.
| Line | Basis | Order of magnitude | Effect on total cost |
|---|---|---|---|
| Financing commission | Amount financed × time | Short rate + 1 to 2.5 points | Proportional to actual duration |
| Factoring commission | Revenue assigned | 0.2% to 1.2% | Independent of duration — this is what bites on short terms |
| Guarantee fund | Retained on each advance | 5% to 15% of the outstanding | Ties up cash, so reduces the real advance rate |
| Ancillary fees | File, chasing, disputes, annual minimum | Varies | Decisive on small volumes |
This is not an argument against factoring: it is an argument for costing it properly before comparing it with an overdraft line or a conventional short-term facility.
3. Receivables assignment: simpler and more limited
Assignment transfers ownership of trade receivables to the bank as security for a facility. It costs less in commissions, but it does not transfer customer risk unless notified and accepted: if the customer does not pay, the bank comes back to you.
- Advantage: readable cost, quick to set up, no guarantee fund.
- Limitation: the bank caps its commitment and reviews it; if a customer's credit deteriorates, the advance rate can be cut at the very moment you need it.
- Export watch-point: not every bank accepts receivables on foreign debtors, and some apply reduced advance rates by country.
4. The letter of credit, and its blind spot
A letter of credit secures one specific transaction: the buyer's bank undertakes to pay against compliant documents. Confirmed by a bank in your own country, it transfers country risk and bank risk.
A letter of credit does not cover currency risk. It guarantees payment of an amount in the contract currency. If that contract is in dollars, you are paid in dollars — and the entire conversion risk remains. This is the most frequent confusion we meet on export files.
Its second blind spot is the cost of document compliance: the rate of discrepancy on first presentation is high in international trade practice, and each discrepancy triggers fees and, above all, a payment delay. The real cost of a letter of credit includes that administrative time, which is rarely budgeted.
5. The currency dimension, absent from every comparison
Financing a dollar receivable raises a question financing comparisons ignore entirely: in which currency do you borrow?
- 1Financing a dollar receivable in euros
You receive euros today and will repay in euros, but you will be paid in dollars. The FX exposure remains in full and has to be hedged separately.
- 2Financing a dollar receivable in dollars
The dollar advance is repaid by the dollar receipt: the position is matched, the exposure disappears with no hedge. The cost is the dollar short rate, to be compared with the euro cost plus the cost of the hedge.
- 3Comparing the two
Interest-rate differential on one side, hedging cost on the other. The two amounts are of the same order by construction — the same parity relationship determines them — but ancillary fees separate them.
6. The decision grid
| Your situation | Solution generally suited |
|---|---|
| Diffuse receivables book, many debtors, permanent need | Factoring, negotiating the factoring commission before the rate |
| A few large good-quality customers, occasional need | Receivables assignment |
| One large transaction, risky country, first business with the buyer | Confirmed letter of credit |
| Need to secure without financing immediately | Credit insurance, with bank financing alongside if needed |
| Receivable in foreign currency, whatever the solution | Finance in the currency of the receivable wherever possible |
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Frequently asked questions
The questions finance departments ask most often on this topic
Is factoring really more expensive than an overdraft?
Often yes in effective rate, but the comparison is not symmetrical: factoring brings the financing, the management of the receivables book, collections and, if non-recourse, protection against bad debt. An honest comparison sets the extra cost against the administrative time saved and the risk transferred, both quantified.
Can you factor receivables on foreign customers?
Yes, that is export factoring, and most factors offer it on OECD countries. Terms vary a great deal with the debtor's country and the invoicing currency: some factors apply a reduced advance rate or decline certain jurisdictions. The financing currency is a point to negotiate explicitly from the outset.
Does a letter of credit cover currency risk?
No. It guarantees payment of an amount in the currency stipulated in the contract, nothing more. If the contract is in dollars, you receive dollars on a date that depends on document compliance — so with uncertainty about the date on top of uncertainty about the rate. An FX hedge remains necessary, and its maturity must allow for the documentary processing time.
What does factoring typically cost a mid-market company?
On an ordinary receivables book, the all-in cost frequently runs between 1.5 % and 3 % of the revenue assigned, depending on the number of invoices, debtor quality and payment terms. That figure bears no relation to the headline financing rate: always ask for a twelve-month simulation on your own activity, all commissions included.
Should an export receivable be financed in euros or in the currency?
In the currency of the receivable wherever possible: the advance is then repaid by the receipt, the position is matched and no FX hedge is needed. Financing a dollar receivable in euros leaves the exposure intact and forces you to hedge separately — which is feasible, but adds a transaction and its cost.
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