What is an escrow account?

An escrow account is a financial arrangement in which a neutral third party, known as an escrow agent, holds and regulates the payment of funds required for two parties involved in a given transaction. It is often used in real estate transactions, but can also be used in international trade to ensure the secure and efficient exchange of goods and services.

Why should you use an escrow account?

One of the main benefits of using an escrow account for international trade is that it provides a level of security for both the buyer and the seller. The escrow agent acts as a neutral intermediary, holding payment until the goods or services have been delivered and both parties are satisfied. This eliminates the risk of non-payment or non-delivery, which can be a major concern in international trade.

Another benefit of using an escrow account is that it helps to streamline the payment process. Instead of having to navigate the complexities of international wire transfers or other forms of payment, both parties can simply deposit their funds into the escrow account and the escrow agent will handle the rest. This can be a major time-saver and can help to reduce the risk of errors or misunderstandings.

In addition, an escrow account can also be used to ensure that all necessary documentation is in order before a payment is released. This can include bills of lading, invoices, and other important documents that need to be reviewed and verified before payment can be made. This helps to ensure that all parties are in compliance with the terms of the transaction and can help to avoid disputes or delays.

While there are many benefits to using an escrow account for international trade, there are also some potential drawbacks to consider.

What are the drawbacks of using escrow accounts?

One of the main drawbacks is the cost. Escrow services can be expensive, and the fees associated with using an escrow account can add to the overall cost of a transaction. This can be especially problematic for smaller transactions where the cost of the escrow services may be a significant percentage of the total cost of the transaction.

Another potential drawback is the time it takes to set up and manage an escrow account. It can take time to find a reputable escrow agent and to get the account set up and running. This can be a major inconvenience for businesses that need to move quickly to take advantage of a particular opportunity.

In conclusion, the use of an escrow account in international trade can provide a level of security and efficiency that is not possible with other forms of payment. By providing a neutral third party to hold and regulate funds, an escrow account can help to eliminate the risk of non-payment or non-delivery, streamline the payment process, and ensure that all necessary documentation is in order. This can be a major advantage for businesses looking to expand their international trade activities.

Tulyp is a BtoB payment and financing solution that supports importers and exporters on a daily basis. As a FinTech specialized in Trade Finance, we support them in their payment guarantee, financing and liquidity issues. If you have any questions, please contact us. One of our experts will contact you within 24 hours.

Invoice financing is a financial solution that allows businesses to receive cash advances on their outstanding invoices. This can provide a much-needed injection of cash for businesses that are waiting for customers to pay their bills.

There are two main types of invoice financing: invoice factoring and invoice discounting:

Invoice factoring involves selling your unpaid invoices to a third party (called a factor) at a discounted rate. The factor then collects payment from your customers and remits the remaining balance to you, minus their fee. This type of financing is often used by businesses that have a high volume of invoices, and need cash quickly.

• Advantages of Invoice Financing:
  

1. Quick access to cash: Invoice financing can provide businesses with the cash they need quickly, which can be especially useful for businesses that have cash flow gaps due to outstanding invoices.
2. Flexibility: Businesses can choose between invoice factoring and invoice discounting, depending on their needs and preferences.
3. Improved cash flow: With invoice financing, businesses can receive cash advances on their invoices, which can help them to meet their financial obligations and invest in growth.
4. No collateral required: Invoice financing typically does not require collateral, which can be beneficial for businesses that do not have assets to pledge.
5. Creditworthiness of the customer: Invoice financing companies typically make their lending decision based on the creditworthiness of the customer, not the business.

• Inconveniences of Invoice Financing:
  

1. Cost: Invoice financing comes with a fee, which can be a significant cost for businesses, especially if they have a high volume of invoices.
2. Loss of control: With invoice factoring, businesses lose control over the collection process, which can be a disadvantage for some businesses.
3. Impact on credit: When businesses use invoice financing, they are essentially taking on debt, which can have a negative impact on their credit scores.
4. Risk of default: If a customer defaults on their invoice, the business may be responsible for the unpaid amount, which can be a financial risk.
5. Not suitable for all businesses: Invoice financing may not be a suitable option for all businesses, particularly those that have a small number of invoices or a high-profit margin.

Invoice discounting is similar to invoice factoring, but instead of selling the invoices, the business continues to collect payment from its customers. The lender, however, will provide an advance on the invoice amount, minus their fee. This type of financing is often used by businesses that want to maintain control over the collection process.

• Advantages of Invoice Discounting:

1. Maintaining control: Invoice discounting allows businesses to maintain control over the collection process, which can be beneficial for businesses that want to maintain a good relationship with their customers.
2. Flexibility: Invoice discounting allows businesses to choose how much of their invoices they want to finance, which can provide them with more flexibility than other forms of financing.
3. Quick access to cash: Invoice discounting can provide businesses with quick access to cash, which can be especially useful for businesses that have cash flow gaps due to outstanding invoices.
4. Confidential: Invoice discounting is often a confidential arrangement between a business and its lender, which can be beneficial for businesses that want to keep their financing arrangements private.
5. Creditworthiness of the customer: Invoice discounting companies typically make their lending decision based on the creditworthiness of the customer, not the business.

• Inconveniences of Invoice Discounting:

1. Cost: Invoice discounting comes with a fee, which can be a significant cost for businesses, especially if they have a high volume of invoices.
2. Risk of default: If a customer defaults on their invoice, the business may be responsible for the unpaid amount, which can be a financial risk.
3. Limited amount of funding: Invoice discounting typically provides a business with a limited amount of funding, which may not be sufficient for businesses that need a large injection of cash.
4. Impact on credit: When businesses use invoice discounting, they are essentially taking on debt, which can have a negative impact on their credit scores.
5. Not suitable for all businesses: Invoice discounting may not be a suitable option for all businesses, particularly those that have a small number of invoices or a high-profit margin.

Both invoice factoring and invoice discounting can provide businesses with the cash they need to meet their financial obligations and grow their operations. However, it is important to keep in mind that invoice financing comes with a fee, so it is important to carefully consider the cost and compare it to other forms of financing before making a decision.

In conclusion, Invoice financing is a financial solution that can help businesses to bridge cash flow gaps by providing an advance on outstanding invoices. It is important to carefully consider the cost and compare it to other forms of financing before making a decision.

Tulyp is a BtoB payment and financing solution that supports importers and exporters on a daily basis. As a FinTech specializing in Trade Finance, we support them in their payment guarantee, financing and liquidity issues. If you have any questions, please contact us. One of our experts will contact you within 24 hours.

Cash is king in business, that is why working capital is one of the most trending subjects right now. They are multiple ways for companies to finance their needs from long-term debt, revenue-based financing, or short terms loans, the financial market offers various instruments for businesses to find the right financing tools.

One of the most common for SMEs is invoice financing which is very common around the world.

What is invoice financing?

Invoice financing is a short-term loan that a financial institution gives to a business based on a face value of an invoice. It can be used on the sale side based on the value of the company clients’ invoices which is called factoring or on the buying side to finance their supply needs

Invoice financing or Factoring on the client-side:

Invoice financing helps businesses improve cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid their balances in full. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money.

Invoice financing can solve problems associated with customers taking a long time to pay as well as difficulties obtaining other types of business credit.

Consider an exporting company that is using factoring to offset the credit risk on their sales :

1. The company ships the goods to their client and invoice them.
2. She sends the invoice details to the invoice financing provider- the factor.
3. The company received a percentage of the face value of the invoice depending upon the lender’s own risk criteria.
4. The company collects the payment from their client.
5. She pays back the factor of the amount lent and receives the portion of the invoice that wasn’t part of the lending deal. (less a service fee)

This financing tool is often used by companies as a liquidity tool to maintain their treasury and offset potential cashflow issues due to late client payments. It is a way of hedging against potential delays on their clients’ repayment.

Invoice financing on the supply side :

On the supply side invoice financing is used as a mechanism to finance operating needs and operations. Based on an invoice due to a supplier, a financial institution will lend the money to a business to pay the amount. The amount lent will be paid back to the financial institution on pre-agreed terms and time frame. This kind of financial tool is a means for companies to finance their treasury and cashflows. A good example of an invoice financing tool for importers is the letter of credit, which is often used for treasury reasons.

Consider a company, that is importing goods they are looking to improve their cashflow so they decide to use the following financing tool describe earlier :

1. The company and her supplier negotiate the purchase order.
2. The company goes to see their financial institution and agrees on the following terms. The financial institution will lend them money and the company will pay the loan back in 60 days.
3. The company pays the supplier with the loan amount and the supplier sends the goods.
4. The goods arrive 30 days later, the company sells the goods to their clients and gets pays.
5. On the 60th day, the company pays back the financial institution with small interest.

Using this mechanism, the company didn’t have to engage funds until the 60th day. If the sales cycle allows it, the company pays back the financial institution using the amount she recovered from selling the goods. The cash flow will be impacted positively by this operation.

At Tulyp, we offer these invoice financing tools for our imports & exports clients. As a FinTech specialized in Trade Finance, the Tulyp solution supports international trade actors on their payment guarantees, financing, and liquidity issues. If you have any questions you can contact us, one of our experts will contact you within 24 hours.

What is a letter of credit?

The letter of credit is one of the most widely used means of BtoB payment in the world of international trade.

It is a bank financial guarantee that allows the exporter to know that he will be paid on the condition that he sends the goods. For the importer, he has the assurance that he will receive the goods, in accordance with the purchase contract and the documentation related to the term defined by the contract.

This means of guaranteeing payments, which is very popular with international trade players, works directly with the banks. It is in fact the customer’s (buyer) bank that undertakes to pay the beneficiary, who is the seller, on delivery of the documents in conformity with the contract.

What guarantees does a letter of credit provide?

If you are an importer, a letter of credit is an assurance that your company will pay for the goods only if the exporter proves that he has sent the goods. It is a form of insurance that allows you to minimize your counterparty risk and protect you in case of attempted fraud by a supplier. The letter of credit also allows you in some cases to keep your liquidity. The buyer don’t have to make an initial payment or advance payment to prove good faith because his bank is committing herself on the company’s behalf.

For the exporter, the letter of credit protects against the risk of non-payment of the goods he has sent to his customer. As the payment is insured by the customer’s bank, the letter of credit protects the exporter against legal risks because the payment of the contract is assured as long as the delivery conditions previously agreed upon are respected.

The letter of credit is therefore a financial hedge for the buyer and seller in an international business transaction.

The different types of letters of credit:

• Revocable or Irrevocable:

In most cases, a letter of credit is irrevocable by default. When issued by the importer’s bank, it guarantees the exporter that he will be paid if he meets his contractual obligations. To cancel an irrevocable letter of credit, all parties to the transaction must agree.

A revocable letter of credit, on the other hand, gives the buyer or his bank the right to modify the terms of the contract. The seller is therefore only partially protected, which is why revocable letters of credit are no longer used.

• Revolving Letter of Credit:

A letter of credit is normally made for each international transaction. In case the importer buys several times from the same supplier, he can ask for the opening of a revolving letter of credit, allowing him to make several commercial transactions within a predetermined amount.

• Transferable letter of credit :

This type of letter of credit applies when there are several commercial actors in a transaction:

1. The importer.
2. A commercial intermediary: an intermediary seller or trader for example.
3. The exporter.

The transferable letter of credit therefore protects the 3rd actor in the financial transaction.

• Confirmed or not confirmed :

Depending on whether a letter of credit is confirmed or not, the exporter who is always the beneficiary of the transaction will have more or less collateral.

When a letter of credit is confirmed, a second guarantee is obtained with another financial institution. It is generally used when there are doubts about the solvency of the bank issuing the first letter of credit. The seller therefore seeks a second guarantee to ensure that he will be paid.

If the letter of credit is not confirmed by a second bank, it is considered unconfirmed.

How does a letter of credit work?

1. The importer and exporter decide to work together and an order is placed.
2. The importer goes to his bank to set up a letter of credit. The cost of setting up a letter of credit is often taken by the importer and can vary from 1% to 8% in extreme cases when the buyer’s creditworthiness is low.The average cost is around 2.5% to 3% + documents movement fees. (without counting the expenses of exchange)
3. The bank transmits the letter of credit to the exporter as a guarantee of payment.
4. The exporter entrusts the goods to the carrier who provides him with the transport documents. The latter gives the documents to the bank issuing the letter of credit.
5. After verification, the bank presents the bill of lading and acceptance to the importer.
6. Payment is issued and the exporter receives payment from the bank.

It is important to note that this is a lengthy process. It takes an average of 5 to 10 business days to set up a letter of credit (acceptance) and about 10 days for the bank to receive and verify the contractual documents.

Letter of credit framework :

 

Advantages and disadvantages of letters of credit :

Advantages:

• The letter of credit protects both parties equally against counterparty risk.
• It is also an interesting cash flow tool for the buyer because in some cases, he does not commit cash until he receives the goods.
• It allows to explore new commercial territories with less risk and protects against external parties to the commercial transaction.

The disadvantages:

• The cost is a major drawback to the use of these products. The average cost is around 2.5% to 3% + document movement fees. (without counting the exchange fees)
• It is a product mainly reserved for large groups. The latter can bear the cost but also prove to the bank that they are solvent and have access to these products.
• The execution time is also a major drawback. It is necessary to count on average 25 working days for the realization of an operation of letter of credit end to end

Tulyp is a FinTech specialized in Trade Finance. The Tulyp solution supports international trade actors on their payment guarantees, financing, and liquidity issues. If you have any questions you can contact us, one of our experts will contact you within 24 hours.